Unless you have substantial out of pocket costs, IRS rules make it very difficult to deduct your medical expenses. The reason: If you itemize your deductions, you can deduct your family’s medical costs, but only if those costs exceed 10% of your adjusted gross income.
Example: your adjusted gross income is $50,000. You must spend over 10%, or $5000, out-of-pocket on prescriptions, co-pays, and other expenses (such as chiropractic costs) not covered by your health insurance, before you can deduct $1 on your tax return.
This 10% rule makes the deducting healthcare costs nearly impossible for most taxpayers.
But with many Americans moving towards high deductible health plans, in an effort to save on insurance premiums, there is a program that can really help. It’s known as a Health Savings Account (HSA).
The concept is very simple: instead of relying on health insurance to pay small medical expenses, you pay them yourself. To help you do this, you establish an HSA at bank or financial institution. It’s like an IRA for medical costs. Here’s the benefits:
- Your contributions to the account are tax deductible in the year you make them
- You don’t have to pay taxes on the interest you earn on the money in your HSA account
- You can withdraw the money to pay almost any kind of health related expense, and you don’t have to pay any tax on these withdrawals.
Note: in order to participate in the HSA program you need a high deductible health plan. These plans are readily available from insurance companies. You can’t have an HSA if you’re covered by health insurance other than a hide adoptable HSA plan
Don’t confuse an HSA plan with an FSA or flexible savings account that you may have with your employer. It’s not a “use it or lose it” plan. In fact, the flexibility of an HSA account is one of its big advantages.
- There’s no minimum annual contribution.
- You can put as much or as little into the account as you wish.
- There’s also no requirement for you to spend the money or take the money out this year.
- You simply contribute whatever you want to contribute this year, and deduct it on your tax return, regardless of whether those funds are actually spent this year on medical expenses.
However, there is a maximum on how much you can set aside every year.
- For the 2015 tax year, single taxpayers can contribute up to $3350
- A family may contribute up to $6650.
- If you are age 55 or older you have the opportunity to make additional tax-deductible contributions up to $1000.
ANCHOR ON THIS: IRS rules and the Affordable Care Act make it tougher and tougher to deduct medical expenses. However, there is a tax advantaged method of buying health insurance: the HSA. HSA’s can save you taxes, but they’re not for everybody. For more information consoled IRS publication 969, or contact us
Jim Flauaus, EA
Enrolled to Practice before the IRS