How to Track Healthcare Expenses for Tax Deductions

Healthcare expenses can be a significant financial burden for many individuals and families. However, understanding how to track and manage these expenses can help you make the most of potential tax deductions. The U.S. tax code allows taxpayers to deduct certain healthcare costs if they exceed a certain percentage of their adjusted gross income (AGI). This article will provide a comprehensive guide on how to track healthcare expenses for tax deductions, including what qualifies as a deductible medical expense, strategies for tracking and organizing these costs, and how to maximize your potential tax savings.

Understanding Healthcare Tax Deductions

Before diving into the specifics of tracking healthcare expenses, it's important to understand how healthcare tax deductions work.

What Are Medical Deductions?

The IRS allows taxpayers to deduct certain medical and dental expenses that exceed a specific percentage of their AGI. These expenses can include a wide range of healthcare-related costs such as doctor visits, prescription medications, hospital stays, and even certain health insurance premiums.

In the United States, as of the current tax laws, taxpayers can deduct medical expenses that exceed 7.5% of their AGI. For example, if your AGI is $50,000, you would need to have medical expenses totaling over $3,750 ($50,000 * 7.5%) before you can begin claiming deductions.

Qualified Medical Expenses

The IRS defines "qualified medical expenses" as those expenses that are primarily for the prevention or treatment of physical or mental conditions. These expenses include, but are not limited to:

• Doctor and dentist visits: Fees for consultations, treatments, and procedures.
• Prescription medications: Any prescribed drugs, including medications for chronic conditions.
• Health insurance premiums: Premiums paid for health insurance, including long-term care insurance.
• Hospital and nursing home care: Fees for inpatient hospital services, surgeries, and long-term care in nursing homes.
• Medical devices: Items such as hearing aids, wheelchairs, and CPAP machines.
• Vision and dental care: Eye exams, glasses, contact lenses, and dental treatments like fillings, cleanings, and braces.
• Therapy and treatment: Physical therapy, mental health therapy, and other forms of medically necessary treatments.
• Specialized care: Expenses for medical care or equipment for a specific condition or diagnosis (e.g., infertility treatments, obesity treatment).

What Does Not Qualify for Tax Deductions?

Not all medical costs are deductible, and it's essential to know what does not qualify in order to avoid confusion and mistakes during tax preparation. The following expenses do not qualify for medical tax deductions:

• Cosmetic surgery: Except when it is needed for medical reasons (such as reconstructive surgery after an accident or injury).
• General health and wellness: Costs for vitamins, supplements, or gym memberships for general wellness are not deductible.
• Non-prescription over-the-counter medications: Unless specifically recommended by a doctor and tied to a medical condition.
• Non-medical expenses: Anything that is not directly related to the diagnosis, treatment, or prevention of a medical condition, such as transportation for personal errands.

Steps to Track Healthcare Expenses for Tax Deductions

Tracking healthcare expenses effectively is essential to ensure you're maximizing your tax deductions. Proper organization and record-keeping will make it easier for you to claim these expenses on your tax return. Below are the steps for effectively tracking healthcare expenses.

Step 1: Organize Your Records

The first step in tracking healthcare expenses is to keep thorough and organized records of all medical-related spending. Create a system that works for you, whether it's a physical filing system or a digital one. Some key records you should keep include:

• Receipts: For any medical purchases, from doctor visits to prescription medications.
• Bills: Keep bills from your doctor, dentist, hospital, pharmacy, and any other medical service providers.
• Insurance statements: Document any out-of-pocket costs that are not covered by your insurance.
• Prescription receipts: These may be available through your pharmacy or online portal and can be vital for claiming deductions on prescription drugs.

Step 2: Categorize Your Expenses

Not all medical expenses will qualify for tax deductions. As you track your expenses, it's helpful to categorize them to distinguish between what qualifies and what doesn't. Some common categories to consider include:

• Out-of-pocket medical services: Includes doctor visits, surgeries, hospital stays, and treatments.
• Medications and medical supplies: Includes prescription and over-the-counter drugs, medical devices like insulin pumps, and bandages.
• Health insurance premiums: This may include premiums paid for your individual or family health insurance plan, including policies through the marketplace.
• Transportation costs: If you traveled for medical care (e.g., to see a specialist or go to a hospital), you can deduct a portion of the transportation costs, such as mileage for using your personal car, taxis, or public transportation.

By organizing your expenses into categories, you will have a clearer understanding of what you can claim for tax purposes.

Step 3: Track Out-of-Pocket Medical Costs

One of the most significant aspects of medical expense tracking is identifying which out-of-pocket costs can be deducted. These expenses include anything that you have paid for after your insurance coverage, and it's essential to document every eligible expense:

• Deductible costs: Costs that were not covered by insurance, such as deductibles, copays, and coinsurance, can be deducted.
• Non-deductible costs: Anything your insurance covered does not qualify as a deductible expense.

It's also worth noting that if you have a Health Savings Account (HSA) or a Flexible Spending Account (FSA), any contributions or withdrawals made to these accounts can be used to reduce your taxable income. However, if you use HSA or FSA funds for medical expenses, you cannot also claim those expenses as deductions.

Step 4: Keep a Running Total

To ensure you're aware of when your medical expenses exceed 7.5% of your AGI, keep a running total of your medical expenses. You can use spreadsheets, apps, or software like TurboTax, which will automatically track these expenses for you. Tracking your running total can help you determine when it's worth filing for deductions.

Step 5: Keep Records of Medical Travel

If you had to travel for medical care, be sure to track the costs associated with the travel. These costs include:

• Mileage: The IRS allows you to deduct mileage driven for medical purposes at a set rate. For 2023, the rate is 22 cents per mile for medical purposes.
• Parking and tolls: These are deductible as long as they are directly related to your medical care.
• Airfare: If you had to fly for medical reasons (e.g., to see a specialist), airfare may be deductible as a medical expense.

It's important to keep detailed records of your travel, including receipts for tolls, parking fees, and fuel, to substantiate these deductions.

Maximizing Your Healthcare Tax Deductions

Once you have effectively tracked your medical expenses, there are several strategies you can use to maximize your healthcare tax deductions.

Use a Tax Professional

Tax laws are complex, and medical deductions can be tricky. If you are unsure whether your expenses qualify or if you are uncertain about how to maximize your deductions, consider consulting with a tax professional. They can help ensure that you don't miss any eligible deductions and that you comply with all relevant tax laws.

Itemize Your Deductions

In order to claim medical deductions, you must itemize your deductions on Schedule A of Form 1040. If your medical expenses, along with other itemized deductions like mortgage interest and charitable donations, exceed the standard deduction, you will benefit from itemizing. The IRS allows you to choose between the standard deduction and itemizing, and you should choose whichever gives you the higher deduction.

Consider Grouping Expenses

If your medical expenses are close to the 7.5% threshold, consider grouping medical expenses in one year to exceed the deduction threshold. For example, if you are scheduled for a major surgery or treatment in the near future, you might delay or accelerate other medical treatments to make sure you exceed the required percentage of your AGI.

Plan for Future Healthcare Expenses

If you have health insurance premiums that are paid regularly, ensure that you factor these into your deduction calculations. You can also set up an HSA or FSA to set aside pre-tax money for medical expenses, which will lower your overall taxable income.

Conclusion

Tracking healthcare expenses for tax deductions requires organization, attention to detail, and an understanding of which expenses qualify under the IRS rules. By systematically recording your medical expenses, categorizing them correctly, and keeping track of your total expenditures, you can maximize your potential tax savings. Whether through traditional record-keeping or using modern tax software, being proactive about managing your healthcare costs is key to making the most of tax deductions available to you.

View Product