Medical Expenses: Definition, Examples, Tax Implications

What Are Medical Expenses?

Medical expenses are any costs incurred in the prevention or treatment of injury or disease. Medical expenses include health and dental insurance premiums, doctor and hospital visits, co-pays, prescription and over-the-counter drugs, glasses and contacts, crutches, and wheelchairs, to name a few. Medical expenses that are not reimbursed are deductible within certain limits.

Understanding Medical Expenses

Taxpayers with access to group health insurance coverage are seldom able to deduct medical expenses that are not reimbursed on their taxes. Only those who itemize their deductions are eligible to claim any medical expenses on Schedule A. Furthermore, only those expenses that exceed 7.5% of the taxpayer's adjusted gross income (AGI) can be deducted.

The medical expense deduction is an itemized deduction, which means it can only be used if someone turns down the standard deduction to claim it. In 2022, the standard deduction for a single taxpayer is $12,950 (increasing to $13,850 in 2022). For married filing jointly returns, the standard deduction in 2022 is $25,900 (increasing to $27,700 in 2023). For head-of-household returns, the standard deduction is $19,400 (increasing to $20,800 in 2023).

In general, it is advised to confirm with your insurance company beforehand what is and isn't covered under your insurance policy. This, however, might not always be possible, such as in the case of an emergency.

Calculating Medical Expenses

Here's how someone deducts medical expenses from their taxes. First, calculate AGI by following instructions found on the first page of Form 1040. Take the result of that calculation and calculate 7.5% of that number. Subtract this result from your total medical expenses for the year. The amount that's left over is the amount you can deduct for medical expenses.

As an example, consider that Anuj's AGI for 2022 was $80,000, and he had $10,000 in medical expenses. Using the AGI limit of 7.5%, he would subtract 7.5% of $80,000, or $6,000, from the $10,000 in medical expenses to get a result of $4,000—and that would be the figure he could claim as a medical expense deduction.

Example of Medical Expenses

The IRS provides a list of medical expenses that qualify to be considered as part of an itemized deduction. Deductible medical expenses include but are not limited to:

• Payments to doctors, dentists, surgeons, chiropractors, and other nontraditional medical professionals.
• Payments for in-patient hospital care or residential nursing home care.
• Payments for weight-loss programs, smoking cessation programs, acupuncture treatments for addiction, or prescription medication.
• Payments for prescription eyeglasses, contact lenses, hearing aids, wheelchairs, guide dogs, or other items purchased to aid physical disabilities.
• Payments for transportation to medical care facilities including standard mileage rate calculations.

Exclusions to Medical Expenses

The IRS does not permit certain types of medical expenses to be included in an itemized deduction. You can't deduct funeral or burial expenses, nonprescription expenses, toothpaste, toiletries, cosmetics, or most cosmetic surgery.

To deduct a medical expense, you must have incurred the expense during the corresponding tax year. You can't take a deduction for any medical expense in which you've received a reimbursement for, regardless of the source of that reimbursement.

The Bottom Line

Taxpayers that incur a large number of medical expenses may receive favorable tax benefits. These medical expenses must be compared to 7.5% of the taxpayer's MAGI. If the expenses exceed this threshold and the prospective benefit is greater than the standard deduction amount, a taxpayer may have their federal income tax liability reduced.