Health Insurance and Medical Expenses: What Can You Deduct?

With the ever-increasing cost of healthcare, you should be vigilant in looking for related tax deductions that are available to you. As we will explain below, a rule change taking effect this year makes a deduction for medical expenses harder for most taxpayers, but you may be overlooking some deductible health insurance premiums that will offset the harsher rule.

Ten Important Facts about Medical Expense Deductions

1. If you qualify, you can normally claim the costs of diagnosing, treating, easing or preventing disease.

2. The deduction is limited (see main article for the exact limitations based on your income, the tax year and your age).

3. Most people don't qualify to take a deduction unless they have a large amount of medical expenses that are not reimbursed. For example, let's say your AGI is $40,000 and you paid medical expenses of $2,500 in 2012. You are 50 years old. For 2012, you cannot deduct any of your medical expenses because they are not more than 7.5 percent of your AGI.

4. You must itemize deductions on your tax return in order to claim medical expenses.

5. The costs of prescription drugs and insulin are eligible for the deduction.

6. Costs paid for medical and dental care and some long-term care insurance qualify.

7. You can include medical and dental costs that you paid in 2012, even if you received the services in a previous year. Keep good records to show the amounts you paid.

8. You may be able to claim the cost of travel to obtain medical care. This includes the cost of public transportation, an ambulance, tolls and parking fees. If you use your car for medical travel, you can deduct the actual costs, including gas and oil or deduct the standard mileage rate for medical travel, which is 23 cents per mile for 2012 (24 cents for 2013).

9. You must reduce your total medical expenses for the year by all reimbursements you receive from insurance companies or other sources. This includes payments from Medicare.

10. If you qualified for medical or dental expenses that would have been deductible in an earlier year, but you did not claim them, you can file an amended tax return for the year in which you overlooked the expenses. An amended return must generally be filed within three years from the date the original return was filed or within two years from the time the tax was paid, whichever is later.

Higher Threshold for Itemized Medical Write-Offs

Before this year, you could claim an itemized deduction for qualified medical expenditures for you, your spouse, and your dependents -- to the extent those expenses exceeded 7.5 percent of your adjusted gross income (AGI). Your AGI is the number at the bottom of page 1 of your Form 1040. It includes all taxable income items and is reduced by certain write-offs including those for moving expenses, deductible IRA contributions, alimony payments, and student loan interest.

The 7.5 percent-of-AGI hurdle was hard enough to clear. Now, thanks to the 2010 healthcare legislation, an even higher 10 percent-of-AGI threshold applies to most taxpayers -- effective for this year and beyond.

Exception: If either you or your spouse will be 65 or older as of December 31, 2013, the unfavorable 10 percent-of-AGI threshold will not affect you until 2017 (until then, the 7.5 percent-of-AGI threshold will continue to apply in your case).

Key Point: For the 2012 tax year, the more-favorable 7.5 percent-of-AGI threshold applies to taxpayers of all ages. So the higher threshold, which takes effect this year, does not affect the 2012 tax return due April 15, 2013 (or October 15 if you file for an extension).

Regardless of which percent-of-AGI threshold applies, don't overlook medical expenses that could push you over the applicable threshold. Health insurance premiums often comprise the biggest category of allowable expenses. Here's what you can include in the potentially deductible pot.

Common Health and Dental Insurance Premiums

You can include garden-variety health and dental insurance premiums to cover you, your spouse, and your dependents--including children. You cannot deduct premiums to cover an under-age-27 adult child unless he or she qualifies as your dependent (that generally means you must provide over half the child's support for the year).Source: Internal Revenue Code Section 213.

Premiums for Medicare Parts A, B, C, and D and Medigap Coverage

The IRS now admits that Medicare insurance premiums count as health insurance premiums for purposes of the itemized deduction for medical expenses. Specifically, premiums for all four Medicare Parts -- A, B, C, and D -- should qualify and premiums for Medigap coverage should too.

Medicare Part A is commonly called hospital insurance coverage. Most eligible individuals are automatically covered for Part A without having to pay premiums because the Part A premiums are considered paid from Medicare taxes on your wages while you or your spouse were working. However if you did not pay Medicare taxes, you may have to pay premiums to get Part A coverage. If so, the Part A premiums for 2012 could have been as much as $451 per month per covered person (up to $5,412 for the year).

Medicare Part B is commonly called medical insurance coverage. Part B coverage together with Part A coverage is often called "original" Medicare. Part B mainly covers doctors and outpatient services, and most people must pay monthly premiums for this coverage. For 2012, you probably paid the standard monthly Part B premium of $99.90 ($1,199 per covered person for the year). Higher-income individuals paid more--up to a monthly maximum of $319.70 for 2012 (up to $3,836 per covered person).

Part B premiums are usually withheld from your Social Security benefits. If so, the amount withheld for the year will show up as an adjustment on Line 3 of Form SSA-1099 (Social Security Benefit Statement), which you should have received from the Social Security Administration (SSA). Part B premiums can add up to significant dollars, especially for married couples when they are being paid for both spouses.

Medicare Part C is for private Medicare Advantage health plan coverage, which is supplemental to government-provided Part A and Part B coverage. Premiums vary depending on the plan. If you have Part C coverage, you don't need Medigap coverage (described immediately below).

Medicare Part D is for private prescription drug coverage. Premiums vary depending on the plan. Higher-income folks pay an "adjustment amount" in addition to basic plan premiums. For 2012, the adjustment amount can be up to $66.40 per month (up to $797 per covered person). Adjustment amounts are withheld from your Social Security benefits and will show up as an adjustment on Line 3 of Form SSA-1099, which you should have received from the SSA.

Medigap Insurance is private supplemental insurance that functions as an alternative to Part C coverage. Premiums vary depending on the plan.

Premiums for Qualified Long-Term Care Insurance

These premiums also count as medical expenses for itemized deduction purposes, subject to the age-based limits shown below. For each covered person, count the lesser of:

  • Premiums paid in the applicable year or
  • The applicable age-based limit.

The age-based limits for 2012 and 2013 are listed below.

Premiums Paid in 2012

Age as of 12/31/12

Max Amount
Treated as Medical Expense

40 or under

$ 350

41-50

660

51-60

1,310

61 to 70

3,500

Over 70

4,370

Premiums Paid in 2013

Age as of 12/31/13

Max Amount
Treated as Medical Expense

40 or under

$ 360

41-50

680

51-60

1,360

61 to 70

3,640

Over 70

4,550

Special Health Insurance Write-Off for Self-Employed Folks

Self-employed individuals who pay their own medical and dental insurance premiums are generally allowed to deduct these costs "above the line" on page 1 of Form 1040. This is a good deal because you need not itemize to benefit from an above-the-line deduction. More good news: You can deduct the cost to cover an under-age-27 adult child, even if he or she does not qualify as your dependent.

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