Outline the specific rules and limitations surrounding the deductibility of medical expenses, including the percentage of adjusted gross income (AGI) threshold that must be met.
The deductibility of medical expenses is governed by specific rules and limitations, primarily revolving around the concept of an adjusted gross income (AGI) threshold that must be met before a deduction can be claimed. Medical expenses, generally speaking, are deductible if they are incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. This encompasses costs for healthcare providers, necessary medical equipment, and certain types of insurance premiums. However, not all medical expenses are deductible. The IRS allows a deduction only for the amount of qualified medical expenses that exceed a certain percentage of your adjusted gross income.
The key limitation for deducting medical expenses is that they must exceed 7.5% of your AGI. Adjusted Gross Income is your gross income less specific deductions like contributions to traditional IRA's, health savings account deductions, and student loan interest. This AGI is not your total income but your gross income as reduced by certain specific deductions. Once you have your AGI, you can calculate the 7.5% threshold that must be exceeded to deduct your medical expenses. If your medical expenses do not exceed this 7.5% threshold, then you cannot deduct any medical expenses on your tax return.
For instance, consider a taxpayer with an AGI of $60,000. The 7.5% threshold would be $4,500 (calculated as $60,000 0.075). If this taxpayer incurs $6,000 in qualified medical expenses, they could deduct $1,500, which is the amount exceeding the threshold ($6,000 - $4,500 = $1,500). However, if the taxpayer only incurs $4,000 in qualified medical expenses, then they would not be able to deduct any expenses, as it doesn't exceed the $4,500 AGI threshold. In this case, $4,000 is less than $4,500 so the deduction cannot be used.
The rules also detail specific types of expenses that qualify as medical expenses. These include payments to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and other medical practitioners. It also covers expenses for medical services, including preventative care, as well as services received at hospitals, nursing homes, or other medical facilities. Additionally, you can include payments for prescribed medications or insulin, as well as medical equipment, such as crutches, wheelchairs, and other diagnostic equipment. Medical insurance premiums, including long-term care insurance premiums, can also be included, subject to certain limitations based on age. Transportation costs primarily for medical purposes, such as travel for doctor appointments or medical treatments, including mileage at the standard medical mileage rate or costs for transportation services like ambulances, are also deductible expenses.
There are also limitations on what cannot be included as deductible medical expenses. For example, you cannot deduct expenses for over-the-counter medications, even if recommended by a doctor, unless they are prescribed by the doctor. Cosmetic surgery expenses are also not deductible unless they are medically necessary to correct a deformity or address a disease. Expenses for general health and wellness, such as gym memberships, weight loss programs not prescribed for disease treatment, and health club dues, are generally not deductible unless you have a doctor's specific prescription to deal with a specific condition. Also, amounts paid for purely personal benefits cannot be deducted as medical expenses. Therefore, it is very important to keep accurate records and have proper documentation for all medical expenses that you plan to include for your deduction. This will ensure they can be verified in case of an audit from the IRS.
Furthermore, you cannot deduct expenses that you have already been reimbursed for by an insurance company or other source, such as health savings accounts, because you only claim the expenses that are from out of pocket payment. The expense must be one that you had to pay yourself and did not get a benefit from a payment by any other party. Therefore, understanding the limits and rules of deductibility is essential in effectively managing your medical deductions.
In conclusion, the deductibility of medical expenses is subject to the 7.5% of AGI threshold, along with the type of medical expenses, and must be carefully monitored, documented, and followed to claim the appropriate deductions, while following the IRS’s rules for qualifying medical expenses. Failing to comply with these rules and limitations can lead to errors and potentially an audit.