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Tuesday's Tax Tip: Medical Deductions

Posted by Gayle Kesten Tuesday, Mar 25, 2008, 10:37 AM ET

We’re barely a quarter of the way through the year, and already each person in my three-member household has been sick twice, entailing a half-dozen doctor appointments and one semi-quick trip to the ER.

Thank goodness for my husband, Master Record Keeper, who meticulously files away each and every medical-related receipt. (This isn't a case of sexism, by the way. He's just better at this stuff.) Good thing, too, because when tax time rolls around, we have all the necessary documentation for deducting qualified medical expenses.

So what is a qualified medical expense? As defined by the IRS, they're "the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. They also include dental expenses. Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness."

What that's saying is medical expenses like your unreimbursed doctor and dentist bills, diagnostic tests, health insurance payments and prescriptions are all deductible. But expenses that merely enhance your general health, such as vitamins or a vacation, aren't.

More for your includable list, from the Small Business Taxes & Management Web site (which is filled with helpful tax-related news and daily tips and should really consider sending out an e-newsletter):

  • Payments for a program to stop smoking and for prescription medicines to alleviate nicotine withdrawal.
  • Weight-loss program as treatment for a specific disease (including obesity) diagnosed by a doctor.
  • Medical aids such as eyeglasses, contact lenses, hearing aids, crutches, wheelchairs, false teeth, etc.
  • Surgery to improve defective vision, such as laser eye surgery or radial keratotomy.

    Also deductible, and often forgotten, transportation-related medical expenses, which includes parking fees, tolls, local transportation and lodging for medical purposes.

    Consultants and small-business owners are eligible to deduct the cost of medical premiums they pay for themselves and employees, though they're advised not to do so within their businesses. "If you mix it within the business schedule, things get complicated as far as issues of 'compensation,'" a tax pro told Fortune Small Business. For those operating as an LLC or corporation, the situation gets more complicated. Check out this informative resource, IncNow, for the specifics.

    All told, the IRS lets you deduct only the amount by which your total medical care expenses for the year exceed 7.5 percent of your adjusted gross income. But here's something to consider, from About.com's Arthritis guide: reclassifying certain medical expenses as business expenses, which is not subject to the 7.5 percent deduction. "If you are disabled and have expenses which are necessary for you to be able to work (impairment-related work expenses), you can take a business deduction for these expenses, rather than a medical deduction."

    What I've detailed in this blog is by no means inclusive. For everything under the sun, I suggest you read through the IRS' comprehensive Publication 502, which covers what will and won't fly by Dr. Sam. You don't have to be an accountant to understand the info, but I wholeheartedly encourage you to consult with one if you have questions.

    Previous Tuesday's Tax Tips:

  • When In Rome...
  • Side-By-Side Look at the Top 10 Online Tax Software Products
  • Deducting Your Home Office
  • Overlooked Deductions

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