Qualified medical expense

What Is a Qualified Medical Expense?

A qualified medical expense (QME) is any cost incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for treatments affecting any structure or function of the body, as defined by the Internal Revenue Service (IRS). These expenses are a core concept within personal finance and taxation, playing a significant role in determining eligibility for tax benefits related to healthcare. QMEs include payments for legal medical services provided by physicians, surgeons, dentists, and other medical practitioners, as well as the costs of equipment, supplies, and diagnostic devices. For an expense to be considered a qualified medical expense, it must primarily serve to alleviate or prevent a physical or mental disability or illness; expenses incurred merely for general health improvement, such as vitamins or a vacation, are typically not included.

History and Origin

The concept of deducting medical expenses from taxable income has a long history in U.S. tax law, evolving with changes in healthcare costs and policy. The Internal Revenue Code, specifically Section 213, lays out the foundation for what constitutes deductible medical expenses. Over the decades, the specifics of the deduction, including the percentage of adjusted gross income (AGI) that must be exceeded for expenses to be deductible, have been adjusted by Congress. A notable expansion occurred in March 2021, when the IRS issued guidance clarifying that amounts paid for personal protective equipment (PPE), such as masks, hand sanitizer, and sanitizing wipes, for the primary purpose of preventing the spread of COVID-19, are treated as amounts paid for medical care.⁵ This ruling broadened the scope of qualified medical expenses in response to a public health crisis.

Key Takeaways

• A qualified medical expense (QME) is a cost paid for the diagnosis, cure, mitigation, treatment, or prevention of disease.
• QMEs are essential for determining eligibility for tax deductions and distributions from tax-advantaged accounts like HSAs and FSAs.
• Only expenses primarily for medical care, not general health improvement, qualify.
• The IRS publishes detailed guidelines in Publication 502 regarding what constitutes a QME.
• Amounts reimbursed by insurance or other sources cannot typically be counted as QMEs for tax deduction purposes.

Formula and Calculation

While there isn't a direct "formula" for a qualified medical expense itself, QMEs are a crucial component in calculating the medical expense deduction on an individual's income tax return. Taxpayers who itemize their deductions can deduct the amount of qualified medical and dental expenses that exceeds a certain percentage of their adjusted gross income (AGI). As of recent tax years, this threshold has been 7.5% of AGI.

The deductible amount is calculated as follows:

This calculation applies only if the result is positive, meaning your total qualified medical expenses surpass the 7.5% AGI threshold. The total qualified medical expenses must be unreimbursed.

Interpreting the Qualified Medical Expense

Understanding what constitutes a qualified medical expense is vital for effective financial planning and maximizing tax benefits. For individuals, correctly identifying QMEs allows for the potential to claim an itemized deduction on their federal income tax return, which can reduce their overall tax liability. Beyond deductions, QMEs are the cornerstone for tax-free distributions from Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs). If an expense is not a qualified medical expense, distributions from these accounts for that expense would generally be taxable and may incur penalties.

Hypothetical Example

Sarah has an Adjusted Gross Income (AGI) of $60,000 for the tax year. Throughout the year, she incurs various healthcare costs not covered by her insurance. Her unreimbursed medical expenses include:

• Doctor's visits: $2,500
• Prescription medications: $1,200
• Dental work: $800
• Physical therapy: $1,500
• New eyeglasses: $400

Her total qualified medical expenses are $2,500 + $1,200 + $800 + $1,500 + $400 = $6,400.

To determine her deductible amount, Sarah first calculates 7.5% of her AGI:
$60,000 (AGI) * 0.075 = $4,500.

Next, she subtracts this threshold from her total qualified medical expenses:
$6,400 (Total QMEs) - $4,500 (AGI threshold) = $1,900.

In this scenario, Sarah can deduct $1,900 as tax deductions on her Schedule A (Form 1040), assuming she chooses to itemize her deductions. If her total itemized deductions, including this medical expense deduction, exceed her standard deduction, she would benefit from itemizing.

Practical Applications

Qualified medical expenses have several practical applications in personal financial management and tax planning:

• Tax Deductions: The most direct application is the ability to deduct medical and dental expenses that exceed a certain percentage of AGI. This can lower a taxpayer's taxable income. Detailed guidance on eligible expenses can be found in IRS Publication 502, Medical and Dental Expenses.⁴
• HSA and FSA Reimbursements: Individuals with Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs) can use these accounts to pay for qualified medical expenses with pre-tax dollars. This offers a significant tax advantage as the funds are not subject to income tax when used for QMEs. This also makes it crucial to track out-of-pocket expenses.
• Long-Term Care: Premiums paid for qualified long-term care insurance contracts can also be considered QMEs, up to certain age-based limits, providing a tax benefit for future care planning.
• Healthcare Cost Management: Understanding what expenses qualify allows individuals to strategically plan for and manage their healthcare costs, potentially using tax-advantaged savings vehicles or anticipating deductions.

Limitations and Criticisms

Despite their benefits, the concept and application of qualified medical expenses have limitations and criticisms. One significant limitation is the AGI threshold for deductions. Because only expenses exceeding 7.5% of AGI are deductible, many individuals with substantial, but not catastrophic, medical bills may not meet the threshold to claim a deduction. This disproportionately affects lower and middle-income individuals who may struggle with medical costs but do not have enough expenses relative to their income to qualify for the tax benefit. An academic analysis of the medical expense deduction highlighted how changes in the AGI limitation have significantly impacted the income profile of taxpayers who claim these deductions, noting that wealthier taxpayers often benefit more in pure dollar terms.³

Furthermore, the IRS definition of a QME can be restrictive, excluding expenses that individuals might reasonably consider healthcare-related, such as non-prescription vitamins for general health, elective cosmetic surgery, or certain health club memberships. This can lead to confusion and frustration for taxpayers. The need for precise record-keeping and understanding complex IRS publications also presents a burden for many, potentially leading to missed opportunities for legitimate tax credit or deduction claims.

Qualified Medical Expense vs. Health Savings Account (HSA)

It is important to distinguish between a qualified medical expense and a Health Savings Account (HSA), as they are related but distinct concepts.

In essence, a qualified medical expense defines what can be paid for or deducted, while an HSA is how one can save and pay for those qualified expenses in a tax-efficient manner. An HSA is a type of tax-advantaged account from which distributions for QMEs are tax-free.

FAQs

What types of expenses generally qualify as medical expenses?

Generally, qualified medical expenses include payments for diagnosis, cure, mitigation, treatment, or prevention of disease, and payments for treatments affecting any structure or function of the body. This covers fees paid to doctors, dentists, surgeons, mental health professionals, prescription medications, and costs for medical equipment like crutches or eyeglasses. You can find a comprehensive list in IRS Publication 502.²

Are health insurance premiums considered qualified medical expenses?

Yes, health insurance premiums, including those for Medicare Part B and D, and certain long-term care insurance premiums, can be considered qualified medical expenses. However, premiums paid with pre-tax dollars through an employer's plan (like those deducted from your paycheck before taxes) are typically not deductible again.

Can I deduct over-the-counter medications?

Generally, no. Most over-the-counter (OTC) medications are not considered qualified medical expenses unless prescribed by a doctor. However, certain OTC items, such as insulin, can be included without a prescription. During the COVID-19 pandemic, the IRS also clarified that personal protective equipment (PPE) like masks and hand sanitizer qualify.¹

What happens if I use my HSA for non-qualified expenses?

If you use your Health Savings Account (HSA) for expenses that are not qualified medical expenses, the withdrawn amount will be subject to income tax and may also incur an additional penalty, typically 20%, if you are under age 65. It's crucial to ensure all withdrawals are for eligible medical expenses to maintain the tax-free status.

Do cosmetic procedures count as qualified medical expenses?

Generally, no. Expenses for cosmetic surgery or other similar procedures are not qualified medical expenses unless the surgery or procedure is necessary to improve a deformity arising from a congenital abnormality, a personal injury, or a disfiguring disease. This distinction highlights the focus on medically necessary treatments for tax deductions.