The IRS and states will often allow taxpayers to reduce their declared income on tax returns for money that was used for certain approved expenses during the year. Because taxes are calculated as a percentage of your declared income, reducing said income will ultimately reduce what you owe the IRS. This reduction is known as a deduction.
Consider the following example:
Marie-Ann earned $45,000 at her job in 2021 as shown on her W-2. Barring any decreases in that income, Marie-Ann will owe $5,654 in taxes. Marie-Ann however has receipts and records saved throughout the year of her medical expenses which totaled $5,000. After considering any limitations on what can be claimed for medical expenses, Marie-Ann is able to receive $1,625 as a reduction in her income. This means her income for calculating taxes is now $43,375. Taxes for that level of income is a much lower $5,291, a savings for Marie-Ann of $363.
Without Medical
Income:
Tax:
$45,000
$5,654
With Medical
Income:
Medical Deduction:
New Income:
Tax:
$45,000
– $1,625
= $43,375
$5291
There are many expenses available to taxpayers as deductions from income. Common ones include medical expenses, casualty losses, mortgage interest, property and sales taxes, state and local taxes, and charitable contributions.
Qualifying medical expenses paid out of pocket can be deducted on taxes for taxpayers who itemize their deductions.
This deduction is generally limited to total expenses that are MORE than 7.5% of your AGI (adjusted gross income). For Marie-Ann, her AGI was $45,000, with 7.5% of that equaling $3,375. This means that of her $5,000 in qualifying medical expenses, she could only claim $5,000 – $3,375 = $1,625 for the medical deduction in income.
It is also important to remember that not all expenses are qualifying. Items purchased just for general health (e.g., vitamins, toothbrushes, Q-tips) are examples of expenses typically not accepted.
A qualified tax preparer or accountant can help you to make the appropriate calculations, but it is your responsibility to maintain the evidence (receipts, invoices, hospital records) and data for the professional to work with.
With dozens of potential expenses to consider, we offer a starting point in the checklist below. Here, you will find some of the most commonly identified expenses as listed in the IRS Publication 502. Remember, this is just a starting point. . . talk to your tax professional to see if there are other items that they want you to track.
Another source you may want to consider looking at is the list of health expenses for Health Care Flexible Spending Accounts (FSA) offered by UPenn. These may not completely overlap with the IRS interpretation, but it offers an in-depth list of expenses you might otherwise overlook.
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