The line between deductible and nondeductible medical expenses by the Internal Revenue Service is admittedly a little vague. The IRS says that for an expense to be deductible, “Medical care . . . must be primarily to alleviate or prevent a physical or mental disability or illness. They don't include expenses that are merely beneficial to general health, such as vitamins or a vacation.”
So who determines whether a treatment is to “alleviate and prevent” or if it’s “merely beneficial?” That can be open to interpretation to some extent. Therapy can certainly be prescribed to alleviate or prevent a number of conditions, both mental and physical. Family or marriage counseling might fall outside the IRS' scope, however, when it’s intended to heal a circumstance in your life like your marriage rather than an ailment of your mind or body.
Is Physical Therapy Tax Deductible?
Physical therapy would fall under the purview of the IRS rules for deductibility if its purpose is to address a physical ailment that’s interfering with your life. H&R Block specifically cites the costs of physical therapy as being tax-deductible.
Is Mental Therapy Considered a Medical Expense?
The IRS specifically states that treatments administered by psychologists and psychiatrists are deductible and that psychoanalysis is covered, too. Counselors who aren’t licensed in any of these fields might be iffy, so check with a tax professional. The IRS does recognize “nontraditional” medical practitioners, however, so again, it can come down to what condition or problem the counselor is addressing.
Alcoholism and drug addiction are covered, and costs associated with inpatient care – including meals and lodging – are deductible. The same goes for occupational therapy, which is defined by the American Occupational Therapy Association as helping people “to do the things they want and need to do through the therapeutic use of daily activities (occupations).” It’s deductible if the therapy targets a mental or physical condition rather than a circumstance.
Transportation Costs Count, Too
The good news here is that if your treatment and condition fall within these parameters, even your transportation costs incurred by traveling to and from treatment are deductible. You can deduct 20 cents per mile driven as of 2019. You can even claim the costs of traveling to Alcoholics Anonymous meetings if your attendance is prescribed by a physician.
'Nontraditional' Medical Practitioners
“Nontraditional” is another confusing term associated with IRS rules for deductibility of medical expenses, regardless of whether those expenses are associated with therapy or other medical care. Even H&R Block refers to “other qualified medical practitioners” without saying exactly what might qualify them.
The terms are generally accepted to include hypnotists, chiropractors, acupuncturists, Christian Science practitioners, and, yes, counselors without degrees in psychology or psychiatry. The bottom line is that the cost must be incurred for the “diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body.”
Therapy Animal Costs
Costs associated with keeping service animals are deductible as medical expenses, but only if the animal’s purpose is to help you with a visual or hearing impairment. In other words, a seeing-eye dog is covered, but you’re on your own with expenses associated with the dog who sticks by your side in public because you suffer from PTSD – at least if you don’t also have a vision or auditory ailment that he’s trained to help you with. Deductible animal-related costs include purchase, veterinary care, food and even grooming.
You Have to Itemize
The next question becomes how to claim the tax deduction you’re entitled to, and several rules apply here. Most importantly, you have to itemize your deductions on Schedule A and file that form with your 1040 tax return. You can’t claim medical expenses and claim the standard deduction for your filing status as well.
You must have paid your therapy expenses during the tax year in question. If you receive treatment in December 2019 but actually pay the practitioner in January 2020, it’s a 2020 deduction.
Limitations on the Deduction
You can’t use all your medical expenses, either. Your itemized medical expense deduction is limited to the amount that exceeds 7.5 percent of your adjusted gross income as of 2018, or 10 percent in 2019. This applies to all your medical expenses, however, not just your therapy expenses.
Maybe you had total medical expenses of $10,000 during the tax year, and your adjusted gross income is $75,000. You’re limited to a medical expense deduction of $4,375 in 2018, or $2,500 in 2019, because you can only deduct the portion of your expenses that exceed either 7.5 percent or 10 percent of your adjusted gross income depending on the year. This works out to expenses in excess of $5,625 at 7.5 percent, and $7,500 at 10 percent – you can only deduct the balance of your expenses over these amounts.
Who Can Claim the Deduction?
On the bright side, you’re not limited to therapy expenses incurred by you personally. You can also deduct expenses you pay for your spouse if you’re married, and for your dependents, assuming you personally paid for them.
Your child dependents don’t necessarily have to live with you for you to qualify for a deduction based on their therapy costs. You can claim the expenses even if you don’t have custody and your ex claims them as dependents on her tax return.
The same goes for someone you would have been able to claim as a dependent except that person didn’t quite qualify as your dependent due to the fact that he filed a joint tax return with his spouse or his gross income was too high. You can claim his therapy expenses, too, according to the same rules.
What If You’re Reimbursed?
Now let’s say that you pay your therapist, then your insurance company, Medicare or even your employer reimburses you for some or all of that cost. You can’t deduct these reimbursed amounts. You can only claim a deduction for the portion of the expenses that you personally paid.
For example, you might have had $2,500 in qualifying medical costs for the year after accounting for that 10 percent adjusted gross income rule, but your employer or your insurance company contributed $2,000 toward that, either paying the money to you or paying it directly to the therapist. In either case, your deduction is now based on $500 in costs, not $2,500. You have to subtract that $2,000. And if you receive reimbursement of $3,000 and your expenses were just $2,500, you would have to include that extra $500 as income on your tax return.
The Effect of the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act had an effect on some of these provisions when it went into effect in 2018. This means that some of them are potentially temporary. They can be influenced by additional legislation, or they might go the way of the wind when the law is set to expire at the end of 2025.
The nature of qualified therapy expenses shouldn’t change because this wasn’t affected by the law in the first place. But the practice of itemizing deductions, which you must do to claim these expenses on your personal tax return, has fallen into disfavor because the law has more or less doubled the standard deductions for each filing status.
Itemizing vs. the Standard Deduction
Remember, itemizing to claim a deduction for your therapy expenses means that you can’t also claim the standard deduction, and the standard deduction is $12,200 for single filers as of 2018 and for those who are married but file separate returns. It’s $18,350 for head of household filers and $24,400 for married taxpayers filing joint returns.
Your total itemized deductions – not just your therapy or medical costs – would have to exceed these thresholds to make itemizing worth your while. Otherwise, you’d be paying taxes on more income than you have to.
For example, you might be single and have $10,000 in itemized deductions. You could only subtract $10,000 from your taxable income if you itemized, whereas you could subtract $12,200 if you claimed the standard deduction. You’d pay taxes on $2,200 more in income.
The Tax Extender and Disaster Relief Act of 2019
You might be able to claim more of your therapy costs in 2019 because new legislation is afoot. The Tax Extender and Disaster Relief Act of 2019, still pending in Congress as of July 2019, includes a provision to slash that 10 percent adjusted gross income rule back to 7.5 percent where it was in 2018, at least for one more year until Jan. 1, 2020. This tweak would be retroactive to Jan. 1, 2019.
Tax Deductions for Physical Therapists
Therapists themselves aren’t left out in the cold when it comes to tax deductions. They, too, can deduct several expenses they incur in the process of performing therapeutic treatment. They’re considered business expenses.
You don’t have to itemize in this case. You would claim these deductions on Schedule C if you’re a sole proprietor, or on a business return if you operate as a corporation. And the list of deductible expenses is somewhat extensive, including everything from reference materials and continuing education costs to office expenses, license fees, insurance costs, legal fees, membership fees with professional organizations and marketing and advertising expenses.
You can deduct the costs of your own psychotherapy as well by itemizing on your personal tax returns with one exception: You can’t include the costs of psychotherapy that’s required as part of your training and licensure to become a psychoanalyst.
The New QBI Deduction for Therapists
Effective with tax year 2018, there’s also a 20 percent qualified business income deduction made available by the Tax Cuts and Jobs Act, although this, too, affects practitioners, not patients.
First, you can deduct all those business expenses on your Schedule C or business tax return, then the law allows certain professionals to subtract an additional 20 percent from the income that remains and only pay income tax on the balance. This tax perk is reserved for “pass-through” businesses. In other words, you’ll miss out if you incorporated your practice.
You’re also limited by income barriers if your enterprise is considered to be a “specified service business,” which basically means that the “principal asset of such trade or business is the reputation or skill of one or more of its employees.” In other words, the therapy you’re providing is the backbone of your income. This provision includes health-related fields.
This doesn’t make you ineligible to claim the QBI deduction, but your taxable income must be less than $157,500 if you’re single or $315,000 if you’re married and filing jointly in order to qualify. That 20 percent begins to “phase out” or reduce at incomes above these thresholds until the deduction finally becomes unavailable entirely if you earn $207,500 or more as an individual, or $415,000 if you’re married and filing a joint return.
- IRS: Topic No. 502 Medical and Dental Expenses
- Consumer Reports: Unusual Medical Deductions You May Not Know About
- eFile: Medical, Dental Expenses and Tax Deductions
- 1040.com: What Medical Expenses Are Deductible?
- TheraNest: New Tax Code, Now What?
- IRS: Publication 502 (2018) Medical and Dental Expenses
- H&R Block: Can I Claim Medical Expenses on My Taxes
- Govtrack: S. 617 – Tax Extender and Disaster Relief Act of 2019
- IRS: IRS Issues Standard Mileage Rates for 2019
- The American Occupational Therapy Association: What Is Occupational Therapy?
- IRS: IRS Provides Tax Inflation Adjustments for Tax Year 2019