Guide to Medical Tax Deductions: How to Help Clients Get Money Back on Healthcare Expenses

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Tax season is fast approaching. And let’s be honest—we don’t know many taxpayers who look forward to tax preparation (except for those of us with a penchant for number-crunching). It’s probably one of the most stressful times outside of the holidays for your clients, especially if they don’t have clarity about how tax planning fits into their comprehensive financial plan. 

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As a comprehensive financial advisor, you’re dedicated to clients’ best interests year-round, which likely includes helping them get the highest tax refund possible. Beyond this year’s refund, you want your clients to grow their tax-planning knowledge and reduce their stress levels. After all, this knowledge will contribute to improved money management throughout the year and to your clients’ financial wellbeing for the rest of their lives. 

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Since you know tax-planning knowledge financially benefits your clients in the long run, it’s worthwhile to help them learn how and when to claim medical expenses for themselves, their spouse, and any of their dependents. This is especially true if they’ve incurred or paid large out-of-pocket healthcare expenses during the tax year, or if their itemized deductions are greater than the standard deduction. 

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While some of your clients already know that medical and dental expenses are tax-deductible in their Schedule A Itemized Deductions (Form 1040 or 1040-SR), it’s not always obvious which expenses can be claimed or how to go about collecting this information. 

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That’s why we’ve provided an overview of medical tax deductions below. And we’ve listed essential information your clients need to collect before completing their Schedule A, meeting with you, and/or discussing their deductions with a CPA.

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With this resource and your personalized financial advice, this year’s medical tax deductions will feel like a walk in the park for your clients. 

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The Standard Tax Deduction Versus Itemized Tax Deductions

As you likely know, the standard deduction for single filers in 2021 is $12,550, and for joint filers, it’s $25,100. Additionally, for those 65 and over or legally blind, the standard deduction is $1,350 higher. (If unmarried and not a surviving spouse, it’s $1,700 higher.) 

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Okay, we know what you’re thinking: Do my clients have a shot at beating the standard deduction and coming out ahead? It’s true, the Tax Cuts and Jobs Act has made it more unlikely for some individuals to benefit from itemizing deductions. 

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Still, the only way to find out if your clients will benefit is to help them with itemized deductions and compare those with the standard deduction to determine which results in a lower tax bill. 

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Medical Tax Deductions: What Healthcare Expenses Are Deductible?

For tax returns filed for the tax year 2021, taxpayers can deduct qualified, unreimbursed medical and dental expenses that are more than 7.5% of their adjusted gross income (AGI). For example, if your clients’ AGI in 2021 was $150,000, they would be able to deduct any qualified medical and dental expenses over the first $11,250.

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The IRS Publication 502 provides an extensive list of medical expenses that qualify for medical tax deductions. A general rule of thumb is that if the healthcare expense prevented or alleviated a specific mental or physical medical problem, then it most likely qualifies as a medical tax deduction. 

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Unfortunately, medical tax deductions do not include costs meant to improve one’s general wellbeing or personal improvements. Gym memberships, daily vitamins, cosmetic surgery (unless it's reconstructive or preventative), or a much-needed vacation are sadly not appropriate for medical tax deductions. 

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Still, your clients should consider the medical costs incurred when receiving care from any of these types of medical practitioners: acupuncturists, chiropractors, dentists, optometrists, medical doctors, occupational therapists, osteopathic doctors, physical therapists, podiatrists, psychiatrists, psychologists, and other practitioners. 

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Your client can also deduct expenses for travel to and from medical care (including parking and hotel stays if required), prescription medications, long-term care services, and self-purchased or certain Medicare insurance premiums. They can also deduct expenses made for medical-related home improvements (such as installing an elevator or accessibility ramp).

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Information Clients Should Collect to Itemize Medical Tax Deductions

If you and your clients have determined that it is in their best interest to take medical tax deductions, they should collect the following information to provide with their annual tax return:

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• Gross Income and Adjusted Gross Income (AGI)
• Medical insurance premiums
• Medical and dental expenses

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Gross Income and Adjusted Gross Income (AGI) 

Gross income is an individual’s total earned pay prior to taxes or deductions. AGI is an individual’s gross income minus any adjustments to their income, including educator expenses, student loan interest, alimony payments, and retirement contributions. 

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It’s the "Adjusted gross income" that matters for deduction purposes. Ultimately, you and your clients should determine whether their estimated medical and dental expenses exceeded 7.5% of their AGI in 2021.

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Medical Insurance Premiums 

Most employees with employer-sponsored health insurance pay their premiums pre-tax and the premiums are automatically deducted from each paycheck. Because of this, most employer-sponsored plans aren’t deductible since they’re already tax-advantaged. 

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However, if your client is self-employed and isn't eligible for subsidized coverage elsewhere (through a different employer or their spouse’s employer), then according to the IRS, they may be eligible for the self-employed health insurance deduction. However, keep in mind that this is treated as an adjustment to income rather than an itemized deduction. 

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Medicare premiums may also be tax-deductible if the cost of premiums for Part B, Part C, Part D, and/or Medigap coverage, plus other eligible medical expenses for the year, exceed 7.5% of the individual’s AGI.

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Medical and Dental Expenses

Your client can only deduct expenses that were not paid by their health insurance plan, Health Savings Account (HSA), or an Archer Medical Savings Account. It’s important to keep track of  each unreimbursed expense in the family to make itemized deductions. 

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Although itemizing tax deductions doesn’t make sense in some cases, it can really pay off in others, especially if your clients know they’ll be spending a lot on their healthcare or on medication costs during the year (like paying for all of their kids to get braces, for instance). 

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Once your client has collected receipts or other proof of healthcare expenses, they should organize the information to make it easier to prepare their tax return or obtain professional advice. Below are categories to include in an unreimbursed medical expenses spreadsheet: 

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• The name and address of each person or entity paid.
• The date and amount of each payment.
• Who paid the expenses.
• Who received the medical care.
• The type of medical care that was received (see the IRS Publication 502 for a comprehensive list of categories).
• A description of the medical care and its purpose.

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Additionally, prescription drug costs can be added to other medical and dental expenses to claim a greater deduction. In the “medicines” category on their organizational spreadsheet, your client should list any unreimbursed expenses they paid for prescription medicines and drugs, including insulin. 

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Partner With Caribou To Add Value to Clients’ Healthcare Planning

At Caribou, we’re committed to helping you engage with your clients in innovative and strategic ways. Taking advantage of medical tax deductions is just a small part of that and a great way to start off a new year! 

By partnering with us, your clients have the opportunity to comprehensively weigh their options, especially when your firm subscribes to our healthcare planning software. Our software helps your clients mitigate financial risk by identifying planning opportunities and predicting costs as they go from building a family to getting ready to retire, and beyond. 

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Consider the value you’ll add to your clients’ lives when they receive a personalized summary of their best-fit medical plan options to make health insurance enrollments and savings easy. 

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To learn more about a partnership with Caribou, click here to schedule a conversation today. Or download our free White Paper for more information about why healthcare is the biggest concern for Americans and actionable steps you can take to incorporate healthcare planning into your service offering.

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Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.