Tax Deductions for Medical Expenses: Qualifying Items & Limits

Definition

Those born after January 2, 1951 may still make a deduction, but their medical and dental expenses must exceed 10% of their adjusted gross income. By deducting these expenses, one’s income is lowered. Therefore, the amount of tax they owe is also reduced.
While tax deductions are not a source of funds for eldercare, a reduced tax burden can enable a family to re-allocate resources to help cover the cost of care. When combined with other options, this might make the difference between being able to afford home care or assisted living. Furthermore, lowering one’s adjusted gross income may help make one eligible for other forms of federal and state assistance.

Medical and dental expense deductions should not be confused with Dependent Care Tax Credit. This credit is meant for dependent care expenses the primary taxpayer incurs to enable them to work, or look for work, rather than caring for their dependent.

Scenarios for Using this Credit

Medical and dental expenses are deductible in each of the following four tax filing scenarios for those born prior to January 2, 1951. For those born after this date, 7.5% needs to be replaced with 10%. 

1) When the care recipient is filing his/her own taxes and their personal annual medical and dental expenses exceed 7.5% of their adjusted gross income.

2) When a married couple is filing jointly and their combined medical and dental expenses exceed 7.5% of their combined adjusted gross income.

3) When a married couple is filing separately. Since the deduction is based on expenses as a percentage of income, splitting income between two individuals and filing separately may yield a greater overall tax reduction.

4) When a family member or caregiver is claiming the care recipient as a dependent, they can combine that individual’s medical and dental expenses with his or her own expenses. If the combined expenses exceed 7.5% of their combined adjusted gross income, they can claim the expenses as a deduction.

Claiming an Elderly Person as a Dependent

There is an exception to the 50% financial support rule made when two or more individuals, typically family members, together contribute at least 50% of the support for the elderly dependent. In this case, the contributors can prepare a mutually agreed-upon “Multiple Support Declaration.” This allows one of the contributing individuals to claim the elderly as a dependent and deduct that elderly person’s medical expenses. When using a “Multiple Support Declaration”, the tax filer needs only to have contributed 10% of the total. Make note, the individual who is deducting the expenses can only use the amount they personally paid.

Expenses

Eligible Expenses

“Medical and Dental Expenses” include a wide range of expenditures, some of which are not immediately obvious. See IRS Publication 502 for a complete list of qualifying medical and dental expenses. A partial list follows.  Worth noting, if a senior is certified as chronically ill, the list of eligible expenses is expanded.

• Medical fees from doctors, laboratories, dentists, assisted living residences, home health care, and hospitals
• Cost of transportation to receive medical care, including ambulance service
• Premiums for health insurance and qualified long term care insurance
• Home modifications costs, such as wheelchair ramps, porch lifts, grab bars, and handrails
• Personal care items, such as disposable briefs, and foods/nutritional supplements for a special diet, as prescribed by a doctor to treat a medical condition
• Cost of prescription drugs
• Entrance fees for assisted living
• Room and board for assisted living if the resident is certified chronically ill by a healthcare professional and is following a prescribed plan of care. Typically, this means that they are unable to perform two activities of daily living (ADLs), such as bathing and dressing, or require supervision due to Alzheimer’s disease or other conditions.

Ineligible Expenses

• Medical expenses that are reimbursed by health insurance, Medicare or any other program.
• Payments or distributions out of health savings accounts
• Non-medical care to enable the tax filer to be gainfully employed. However, the taxpayer can receive a tax credit for this through the Child and Dependent Care Credit
• Life insurance premiums

Medical Expense vs. Dependent Care Credit

The cost of home care, used to enable the taxpayer to work outside the home while care is provided for a dependent, can be applied either as a Medical Expense Deduction or using the Dependent Care Credit, but not both. For most families, it is advantageous to apply care expenses, which enable you to be gainfully employed, towards the Dependent Care Credit up to the maximum allowed (as of 2017, up to $3,000 in expenses may be used to calculate the credit), and then apply the remainder of those expenses as Medical Expense deductions. However, this may not always be applicable.

Qualifications for Deducting Elderly Dependent’s Expenses

• Age – there are no age qualifications for this credit. However, those 65 years of age and older need their medical and dental expenses to exceed 7.5% of their adjusted gross income. Those under 65 years of age must have medical and dental expenses that exceed 10% of their adjusted gross income. 
• Health – strictly speaking, there are no health-related restrictions on claiming individuals as dependents. However, the number of items that are defined as “medical expenses” is much greater if the dependent is certified chronically ill by a healthcare professional and is following a prescribed plan of care. Typically, this means that the dependent is unable to perform two ADLs or requires supervision, due to Alzheimer’s disease or other conditions.
• Family Status – anyone regardless of family relation can be claimed as a dependent if they have resided with the primary tax filer for one year. If they have not, then the following relations are eligible: Parent, grandparent, stepparent, father-in-law, mother-in-law, siblings (including step, half and in-law), aunt, and uncle.
• Financial (Tax Filer) – the Claimer must provide over half of the dependent’s financial support for the year in which they are filing. Support is considered in the year in which the bills were paid, not the year in which the services were provided. There is an exception to this rule when two or more persons together contribute 50% of the support. In this case, the contributors can prepare a mutually agreed-upon “Multiple Support Declaration” or MSD. This allows one of them to claim the elderly as a dependent. Using a MSD, the claimer needs only to have contributed 10% of the total.
• Financial (Dependent) – to qualify as a dependent, the individual’s gross income for the year must be less than $4,050. While that figure sounds very low, certain income sources are exempt. Most importantly, social security and supplemental security income. Pension income is not exempt. There is not a hard asset limit for the dependent. However, those with even a moderate level of assets often generate income from those assets and are, therefore, disqualified because they exceed the income level limit.

Credit Amounts & Limits

Tax filers can deduct the amount of medical expenses that exceed 7.5% (or 10%, based on the age of the individual) of their adjusted gross income (your AGI is found on form 1040, line 38). Or stated in another way, subtracting 7.5% (.075) of your AGI from your total medical expenses will yield your medical expense deduction.

For example, if your adjusted gross income was $50,000, and your total paid medical expenses were $10,000, your medical expense deduction would be $6,250 as shown in the table below. Assuming a typical tax rate of 16%, the annual tax savings would be approximately $1,000.

How to File

Families need to use a Form 2441 to claim the dependent credit and Schedule A for the medical deduction.