Julie Hayes is the Content Manager at Benjamin Rose Institute on Aging.
Editor’s Note: A reminder that this article is not a substitute for professional tax advice. As you prepare your taxes or a loved one’s, please consult a professional tax preparer or IRS.gov to find advice for your specific situation.
Tax time is never fun, but when you’re armed with knowledge on how to take advantage of deductibles, it can be a bit easier. As a caregiver to an older adult who visits doctors throughout the year, it’s important for you to understand how to apply tax deductibles to these medical expenses. With this information in your arsenal, you can give your loved one better financial guidance.
According to a National Bureau of Economic Research study, Medicare, Medicaid, private insurance and other government programs on average will cover about 80 percent of an older adult’s healthcare costs; however, this leaves 20 percent of costs financed out-of-pocket. For someone who is in a low-or middle-income household, or is retired or living on a budget, this can amount to a substantial portion of whatever money has been saved. As a way to manage these costs, the Internal Revenue Service (IRS) offers Qualified Medical Expenses (QME) as itemized deductibles on income tax returns. They cover standard medical expenses, as well as dental, vision and prescriptions. These can help your loved one to maximize on his or her deductibles during tax season.
What portion of medical expenses can be deducted?
Per 2019 IRS guidelines, an individual may deduct expenses that are more than 7.5 percent of their adjusted gross income (AGI). For example, if the person’s AGI is $40,000, anything after the first $3,000 of his or her medical expenses may be deducted.
The rule will change for the 2020 tax year. When paying taxes for 2020 income, an individual may deduct expenses that are more than 10 percent of his or her AGI, rather than 7.5.
As with all itemized deductibles, in order for your loved one to claim these expenses, he or she will need to give up the standard deduction amount offered by the IRS. If you add up the itemized deductions and they are less than the standard deduction amount for the filing status, this means your loved one will likely end up paying more in taxes by itemizing. If this applies to your loved one’s situation, consider forgoing having him or her itemize these deductions, and instead claim the standard deduction amount.
Which medical expenses qualify as QMEs?
The IRS has a full, alphabetized list of possible 2019 medical expenses. Among them are:
· Diagnostic devices
· Long-term care
· Body scans
· Eye exams
· Oxygen equipment
· Chiropractor fees
· Dental treatments
· Nursing services
· Medical aids such as wheelchairs, hearing aids, eyeglasses, crutches, contact lenses and guide dogs
· Hospital care
· Physical examinations
· Transportation costs for obtaining medical care
Keep in mind that some expenses are only deductible under certain conditions. For example, cosmetic surgery cannot be included as a QME if the procedure was done to improve appearance and didn’t meaningfully prevent or treat an illness or disease. However, this expense can be deducted if the procedure was necessary to treat or improve a deformity related to, or arising from, a congenital condition, disfiguring disease or an injury resulting from an accident or trauma.
The same is true for physical activity lessons (dancing, swimming, etc), health club fees and weight loss programs. Even if physical activities were recommended to your loved one by a doctor, they can only be covered if they were prescribed to treat or manage a specific condition. Dancing or swimming lessons to promote general wellness, for example, are not covered. Weight loss programs must also be diagnosed by a physician as treatment for a specific disease such as hypertension or heart disease to be included.
Some expenses cannot be included, regardless of circumstances. Funeral expenses, for example, cannot be deducted, nor can nonprescription drug costs.
How are QME deductions filed?
QMEs are filed as a part of the taxable income form, Form 1040, Schedule A.
Proper documentation is essential to proving not only that your loved one paid these expenses during this tax year, but also that these expenses are deductible to begin with. As an example, if your loved one wants to deduct the expenses of a special diet prescribed by his or her physician, the IRS must know the prescription exists in order for the deduction to qualify. Make sure to keep careful records of your loved one’s bills and prescriptions, and write down details of anything that isn’t clear. If he or she purchased a necessary assistive device at a store, write the details on the receipt of why the device was necessary.
If you’re unclear on how to file these taxes, be sure to ask for help, rather than do it incorrectly. Tax software like TurboTax and H&R Block can guide the two of you through this process together, as well as review and submit the required forms. It may also help to hire an accountant or tax professional who can work with you both to fill out the tax return and maximize on your loved one’s deductibles.
You might also make use of specific programs to help older adults with their taxes, such as the free, government supported Tax Counseling for the Elderly Program (TCE) and Volunteer Income Tax Assistance (VITA) service for low-income older adults. To locate VITA and TCE help in your area, search your zip code in the online locator.
Remember that tax regulations are constantly changing, and the guidelines for QMEs may be different from one year to the next. Keep up-to-date by visiting the IRS website to see what may have changed since the 2019 tax season.