By Lisa Zamosky
When preparing taxes, many people make the mistake of overlooking deductible health care expenses, which can reduce the overall cost of medical care and insurance. In fact, according to Michael Mahoney, vice president of consumer marketing for GoHealth, an online source for health insurance, a self-reported survey conducted by the company found that most people eligible for medical deductions were missing out on savings. “We found that only about one-third of the people who thought they had deductible expenses were actually going to deduct them,” Mahoney says.
Here, six tips to help you avoid leaving money on the table, and to maximize your healthcare expenses during tax time.
1. Take a Break on Self-Employment Taxes
People with self-employed income may be able to deduct health insurance premiums paid for both themselves and their dependents as a business expense. Just keep in mind that you cannot deduct the cost of premiums paid for any month during which you were eligible for insurance through an employer.
Also, your self-employment income must be more than the total amount of health insurance costs you’re trying to deduct.
2. Itemize Your Expenses
If you spent 7.5% of your adjusted gross income (AGI) on medical care in 2011, you can deduct costs that exceed that amount from your income at tax time. The IRS offers this example to illustrate how it works:
Assume your AGI is $40,000: 7.5% of $40,000 is $3,000. If you paid $2,500 in medical expenses, you cannot deduct any of your medical expenses because they are not more than 7.5% of your AGI.
While 7.5% of one’s income is a lot to spend on medical care, rising deductibles and co-pays, along with shrinking incomes have made more people eligible for these deductions. According to the IRS, about 10 million taxpayers claimed medical deductions in 2009.
3. Know What to Deduct
What are some of the biggest medical costs most people can deduct? “As a country we spend a lot of money on medications,” Mahoney says. The general rule, he says, is any medication prescribed to you by a physician, including those sold over-the-counter, can be deducted.
But there’s much more — dental work, visits to your chiropractor or acupuncturist, smoking cessation programs, eye glasses and contact lenses, just to name a few, are all expenses the IRS allows you to deduct from your income.
In addition, Mahoney urges consumers not to overlook less obvious items that can be tied to medical costs. “One that’s prevalent is an at-home pregnancy test,” Mahoney says. The cost of travel to and from a doctor’s office or hospital can be deducted as well.
And, if you have Medicare coverage and premiums for Medicare Parts B or D were deducted from your Social Security check, those costs may be deductible.
4. Deduct Costs for Aging Parents
More than 65 million people in the U.S. provide care for a family member who is chronically ill, disabled, or aged, which often involves providing financial support. If in 2011 your elderly parent earned less than $3,700, not including their Social Security income, and you were the source of more than half of his or her financial support, you may be able to claim your parent as a dependent and deduct your costs. That’s true even if your parent does not live with you.
5. Look for Capital Expenses
According to Mahoney, if you had to install in-home medical equipment, such as a wheelchair ramp or moveable stairs in your home to accommodate a medical condition for you or a dependent, you may be able to deduct the cost. “If you had to do it for medical reasons but wouldn’t have spent the money without the medical condition, it’s deductible,” Mahoney says.
6. Max out your HSA
A Health Savings Account (HSA), used with a high deductible health plan allows you to deposit a portion of your pretax income into a savings account and use the money to pay for qualified medical expenses. The tax advantages of these accounts can be significant, so you want to make sure you’re deducting your contributions.
Keep in mind: You have until April 17, 2012 to contribute up to $3,050 for individuals and $6,150 for families. If you’re older than 55, you may qualify to make an additional $1,000 contribution to your HSA for 2011. For more details on HSAs, check out IRS Publication 969.