What if your medical and dental expenses are usually less than the 7.5% minimum medical expense level, so that you are unable to claim any medical deduction on the Form Schedule-A, is there another way to save money and not pay Federal Income taxes on money spent on medical expenses? YES.
When filing annual taxes on IRS Form 1040 you can itemize deductions instead of using Standard Deductions for Single, Head of Household and Married. The itemized deductions are filed on IRS Form 1040 Schedule-A. The first section of the Schedule-A calculates the deduction for medical expenses. But the medical and dental expenses must be greater than 7.5% of your Adjusted Gross Income, AGI, before it is deductible. As an example, if the AGI was $50,000 then the thrush hold to medical expense deductions is 50000 x .075 = $3,750. If total expenses were $3,751 then there would be $1 of medical expense deductable.
The calculation:
Line 1, Enter total amount paid for medical and dental expenses.
Line 2, "Enter amount from Form 1040, line 38." Your Adjusted Gross Income, AGI.
Line 3, "Multiply line 2 by 7.5%." Your minimum medical expense level.
Line 4, "Subtract line 3 from line 1." If the value is a positive number, enter your Medical Deduction, other wise enter zero.
There are two ways many people use to get tax deferment on medical expenses even when they do not reach the 7.5% thrush hold.
Many companies that provide their employees medical insurance as part of their compensation package allow the employee’s portion of the insurance payment to be deducted from their paycheck either before income-tax-deduction or after income-tax-deduction.
If you paid for your medical insurance out of your check book, that would be after tax deductions. Your claimable medical deductions for this expense begin at 7.5% of your AGI, most likely you would not be able to deduct the tax dollars that are included in those medical expenses.
The alternative choice is to get your employer to deduct your medical, dental, and long term medical care insurance premiums before Federal Taxes are deducted. This will save ten to twenty percent, depending on you tax bracket, on your medical insurance expense. This could be worth hundreds of dollars in savings over a year of insurance premiums.
Another effective way to save money on your medical expenses is to set up a HSA, Health Savings Account.
Quoting the IRS Publication 969 Cat. No. 24216s, Health Savings Accounts and other Tax-Favored Health Plans:
"A Health Savings Account (HSA) is a tax-exempt trust or custodial account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur."
The benefit to a HSA is the ability to claim tax deductions to money contributed into the HSA even if you don not itemize using a Schedule-A. Your employer contributions to your HSA is excluded from your AGI, and any contributions you make with after-tax dollars can be deducted from your AGI effectively eliminating the Federal taxes on those dollars.. The contributions to your HSA remain or roll-over in your account year by year. Any interest earned on money in the account is tax free. And primarily and most important the distributions from the HSA to "Qualified Medical expenses" are tax free.
Are you familiar with what happens if you withdrawal money from a Traditional Retirement Account, known as an IRA, before you are age eligible? There are authorized reasons that allow withdrawals with out penalties but Federal Income Tax would still be due. Other than those few reasons, besides owing the Federal Income tax dollars based on you current year AGI you are penalized ten percent of the total value withdrawn.
The HSA being a Federal Tax deferred account has similar penalties. Do not abuse this account, instead of saving you money it could cost you big time.
If your employer sets up and contributes to your HSA the employer contributions are not included in you income statement. You report your after tax contributions to your HSA on IRS Form 8889. This form allows you do deduct medical expenses that other wise would not get deducted on the Medical Expense section of Schedule-A because of the 7.5% thrush hold.
There are a few other types of tax deferred accounts for medical expenses, each having its advantages and disadvantages. The HSA is the newest one and for most people is the one to choose when it is available.
The IRS published an information manual for the IRS Form1040 Schedule-A, Publication 502 Cat. No. 1500Q, Medical and Dental Expenses for 2006. It is the IRS explanation for medical and dental expenses, Publication 502 and is 25 pages long. This 25 page publication is everything you need to know to fully understand what is included on Line 1.
The most important definition is answered by a question in this publication.
What Are Medical Expenses?
Medical expenses are the costs of diagnoses, cure, mitigation, treatment, or prevention of diseases, and the costs for the treatments affecting any part or function of the body. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. They also include dental expenses. Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.
Medical expenses include the premiums you pay for insurance that covers that expresses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term insurance contract.
The medical expense must be paid during that tax year. An example would be, if you received medical care in December of year 2006, but you did not pay the bill for the service until January of 2007, the expense goes on the 2007 tax claim.
Also the medical expenses must be paid only for the care of yourself, your spouse and all "Qualified Dependents" you are claiming on that years tax filing.
Whole publications are written on the detailed definition of "Qualified Dependents," so for the purpose of this article, assume that it pertains to those you are able to claim on the front of your IRS Form1040.
Many people are missing out on some deductible expenses by not claiming expenses for personal care that could be included in medical expense deductions. Here is a list for example purposes of items and services that are deductible expenses.
Abortion
Acupuncture
Alcoholism
Ambulance
Artificial Limb
Artificial Teeth
Autoette
Bandages
Breast Reconstruction Surgery
Birth Control Pills
Braille Books and Magazines
Capital Expenses
Car
Chiropractor
Christian Science Practitioner
COBRA Continuation Health Coverage
Contact Lenses
Crutches
Dental Treatment
Diagnostic Devices
Disabled Dependent Care Expenses
Drug Addiction
Drugs
Eyeglasses
Eye Surgery
Fertility Enhancement
Founder's Fee
Guide Dog or Other Animal
Health Institute
Health Maintenance Organization (HMO)
Hearing Aids
Home Care
Home Improvements
Hospital Services
Insurance Premiums
Laboratory Fees
Lead-Based Paint Removal
Learning Disability
Legal Fees
Lifetime Care—Advance Payments
Lodging
Long-Term Care
Meals
Medical Conferences
Medical Information Plan
Medical Services
Medicines
Mentally Retarded, Special Home for
Nursing Home
Nursing Services
Operations
Optometrist
Organ Donors
Osteopath
Oxygen
Prosthesis
Psychiatric Care
Psychoanalysis
Psychologist
Special Education
Sterilization
Stop-Smoking Programs
Surgery
Telephone
Television
Therapy
Transplants
Transportation
Trips
Tuition
Vasectomy
Vision Correction Surgery
Weight-Loss Program
Wheelchair
Wig
X-ray


There may be a few surprises on this list. What they all have in common is that they all MUST be directly in line with the Medical Expense definition as stated above. If you meet that definition then things like Acupuncture, Car, Chiropractor, Home Care, Telephone and Television all are services that may be listed and if you follow these suggestions it may save you some big dollars.