What Are Qualified Medical Expenses?
Qualified medical expenses are costs incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, as defined by the U.S. Internal Revenue Service (IRS). These expenses fall under the broader category of personal finance and taxation, specifically impacting an individual's potential tax deduction opportunities. They include payments for medical services, dental care, prescription medications, and certain long-term care services, among other things. Understanding what constitutes qualified medical expenses is crucial for individuals seeking to reduce their taxable income through itemized deductions.
History and Origin
The concept of deducting medical expenses from federal income tax has roots in U.S. tax law dating back to the mid-20th century. This provision was established to provide some relief to taxpayers facing significant healthcare costs. Over the years, the specifics of what qualifies and the thresholds for deduction have evolved, often in response to broader healthcare policy changes and economic conditions. The Internal Revenue Service periodically updates its guidance, notably through publications like IRS Publication 502, which details eligible medical and dental expenses. This publication serves as the primary reference for taxpayers and has been updated consistently over decades to reflect current tax law and medical advancements.8,7
Key Takeaways
- Qualified medical expenses are out-of-pocket costs for medical and dental care that can be deducted from income for tax purposes.
- These expenses must be primarily to alleviate or prevent a physical or mental disability or illness.
- Deductible amounts are subject to an Adjusted Gross Income (AGI) threshold, meaning only expenses exceeding a certain percentage of AGI are deductible.
- Premiums paid for certain types of health insurance may also be included as qualified medical expenses.
- The IRS provides detailed guidance on what expenses are considered qualified.
Interpreting Qualified Medical Expenses
Interpreting what constitutes qualified medical expenses involves understanding the criteria set forth by the IRS. Generally, the expense must be for medical care and not merely beneficial to general health. For instance, costs for diagnosis, treatment, and prevention of disease are included, but expenses for cosmetic surgery (unless necessary to alleviate a congenital deformity or personal injury) are not. Prescription medications and insulin are typically included, while over-the-counter medications usually are not, unless prescribed.6
The total amount of qualified medical expenses is then compared against the taxpayer's adjusted gross income (AGI). For most taxpayers, only the amount of medical and dental expenses exceeding 7.5% of their AGI can be deducted. This threshold means that for many, even significant medical costs may not result in a tax benefit if they do not surpass this percentage.5 This provision highlights the importance of detailed record-keeping for tax planning purposes.
Hypothetical Example
Consider Jane, who has an adjusted gross income (AGI) of $50,000 in a given tax year. The AGI threshold for deducting medical expenses is 7.5%.
Her deduction threshold would be:
Throughout the year, Jane pays various out-of-pocket medical expenses:
- Doctor visits: $1,500
- Prescription medications: $800
- Dental work: $1,200
- Hospital stay co-pay: $2,000
Her total qualified medical expenses are:
To determine her deductible amount, Jane subtracts her AGI threshold from her total qualified medical expenses:
In this scenario, Jane can deduct $1,750 in qualified medical expenses on her tax return if she chooses to utilize itemized deductions.
Practical Applications
Qualified medical expenses play a significant role in income tax planning for individuals and families. They are primarily relevant for taxpayers who choose to itemize their deductions on Schedule A (Form 1040) rather than taking the standard deduction. This can be particularly beneficial for those with high healthcare costs due to chronic conditions, unexpected medical emergencies, or significant dental work.
Beyond direct tax deductions, understanding qualified medical expenses is critical for the proper use of tax-advantaged health accounts. These include Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs). Funds from these accounts can typically be used tax-free for qualified medical expenses, providing a powerful tool for managing healthcare costs. For example, distributions from an HSA are tax-free if used for qualified medical expenses.4 The escalating cost of healthcare in the United States, as tracked by organizations like the Kaiser Family Foundation, underscores the financial importance of these tax provisions for many households.3
Limitations and Criticisms
While providing a potential tax benefit, the deduction for qualified medical expenses has limitations. The most notable limitation is the adjusted gross income (AGI) threshold, which significantly restricts who can claim the deduction. Because only expenses exceeding 7.5% of AGI are deductible, many individuals with substantial but not catastrophic medical bills may not meet the threshold. This can be particularly challenging for middle-income earners who might struggle with medical costs but do not have sufficiently high expenses to qualify for the deduction.
Additionally, the requirement to itemize deductions means that taxpayers must forgo the standard deduction, which for many, especially after tax law changes, may offer a greater tax benefit. This effectively limits the medical expense deduction to those whose total itemized deductions, including medical expenses, exceed the standard deduction amount. The complexity of determining what constitutes a qualified expense, as outlined by the IRS, can also be a challenge for taxpayers, requiring meticulous record-keeping and a thorough understanding of tax regulations. Furthermore, the rising cost of healthcare, a persistent challenge in the U.S. as noted by entities like the Social Security Administration, continues to pressure household budgets, even with these deduction provisions.
Qualified Medical Expenses vs. Health Savings Account (HSA)
While both terms relate to healthcare costs, "qualified medical expenses" and "Health Savings Account" refer to different concepts within personal finance and taxation.
| Feature | Qualified Medical Expenses | Health Savings Account (HSA) |
|---|---|---|
| Definition | Specific costs for medical and dental care defined by the IRS that may be deductible or eligible for tax-free reimbursement. | A tax-advantaged savings account available to individuals enrolled in a high-deductible health plan (HDHP), used to save for and pay for qualified medical expenses. |
| Purpose | To identify expenses that can potentially reduce taxable income through an itemized deduction or be paid/reimbursed tax-free from certain health plans/accounts. | To provide a tax-preferred savings vehicle for healthcare costs, allowing tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. |
| Nature | A category of eligible healthcare costs. | A type of financial account or investment vehicle. |
| Eligibility | Varies based on specific expense type and IRS rules. | Requires enrollment in a high-deductible health plan (HDHP) and not being enrolled in Medicare or having other disqualifying health coverage. |
| Relationship | HSAs are specifically designed to pay for qualified medical expenses. Distributions from an HSA are tax-free if used for these specific expenses. | Funds in an HSA can only be used tax-free for expenses that meet the IRS definition of qualified medical expenses. |
| Tax Implication | Can be deducted if itemizing and exceeding AGI threshold; can be reimbursed tax-free from HSAs/FSAs/HRAs. | Contributions are tax-deductible, earnings grow tax-free, and withdrawals are tax-free if used for qualified medical expenses. |
In essence, qualified medical expenses are the "what" (the types of costs), while an HSA is the "how" (one of the primary mechanisms for tax-advantaged savings and payment for those costs).
FAQs
What types of expenses are typically considered qualified medical expenses?
Generally, expenses for the diagnosis, cure, mitigation, treatment, or prevention of disease are qualified. This includes payments to doctors, dentists, surgeons, hospitals, and for prescription medicines, insulin, and certain medical equipment or supplies. Premiums for medical and dental health insurance can also be included.2
Are over-the-counter medications qualified medical expenses?
Typically, over-the-counter (OTC) medications are not considered qualified medical expenses unless they are prescribed by a doctor. However, insulin is an exception and is considered a qualified medical expense even without a prescription.
Can I include travel costs to get medical care as qualified medical expenses?
Yes, you can include amounts paid for transportation primarily for and essential to medical care. This can include actual car expenses (gas, oil, tolls, parking fees) or a standard mileage rate for medical travel, as well as bus, train, or taxi fares.1
What is the AGI threshold for deducting qualified medical expenses?
For most taxpayers, you can deduct the amount of your medical and dental expenses that exceeds 7.5% of your adjusted gross income (AGI). This means only the portion of your expenses above this percentage is deductible.
Do I have to itemize my deductions to claim qualified medical expenses?
Yes, the deduction for qualified medical expenses is an itemized deduction, meaning you must forgo the standard deduction and itemize your deductions on Schedule A (Form 1040) to claim them. This makes it important for tax planning to determine whether itemizing or taking the standard deduction provides a greater benefit.