Health costs continue to rise, taking a bite out of your budget. The Centers for Medicare & Medicaid Services reports that in 2010, health care costs represented 17.9 percent of the U.S. gross domestic product, the equivalent of $8,402 per person annually. Tax breaks can help ease some of the sting of these high costs. A combination of tax deductions and tax credits can help lower your tax bill. You’ll need to keep good records to make the most of these tax benefits.
If you itemize deductions, you can deduct unreimbursed health care costs that exceed 7.5 percent of your adjusted gross income. If you’re subject to alternative minimum tax, your health expenses must exceed 10 percent of your adjusted gross income before they’re deductible. This does not include any expenses reimbursed by insurance or your employer. Starting in 2013, under the provisions of the Patient Protection and Affordable Care Act, everyone except those 65 and older will be subject to the 10 percent limit. Amassing enough expenses to qualify for a deduction can be tough for many people. To maximize your deduction, keep track of all expenses, including for things such as eyeglasses, dental work and elective surgery, as well as the premiums you pay for long-term care insurance, mileage to medical appointments and expenses you pay on behalf of a parent or other relative who doesn’t live with you.
Health Insurance Premiums
Self-employed persons can deduct the premiums paid for health insurance on Form 1040, even if you don’t itemize deductions. If you're employed, you can pay for your share of health insurance premiums with pre-tax dollars.
Health Savings Accounts
Money you deposit in a health savings account is deducted from your income before taxes. If you have a high-deductible health plan that qualifies for a health savings account, put the maximum amount in the account each year to take advantage of the full tax benefit. In 2011, an individual could deposit up to $3,050 in an official health savings account each year, while a couple could contribute up to $6,150. You can use the money in an HSA to pay for non-reimbursed medical expenses. If you use an HSA to pay for these expenses, you cannot also deduct them as part of your itemized deductions.
If you’re married and one of you incurs a lot of medical expenses in a year, consider filing as "married filing separately." Doing so separates each partner’s adjusted gross income, which should allow you to deduct a larger portion of the medical expenses if you itemize. Also, if it’s possible to bunch medical expenses together in a year, such as scheduling elective surgery in a year when you already have a lot of medical expenses, this will help you to maximize your medical expense deduction.
Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University.