This information has been reviewed and is accurate for the tax year 2016, which is filed in the calendar year 2017.
Medical and dental expenses can be deducted if their total sum exceeds 7.5% of the tax filer’s Adjusted Gross Income (AGI). However, the tax filer, or his or her spouse, must have been born before January 2, 1951 (a minimum of 65 years of age) for this deduction. As an example, say a tax filer has an AGI of $35,000 and has paid $5,000 in medical and / or dental bills for the year. 7.5% of $35,000 comes to $2,625. Therefore, $2,375 can be deducted as a medical and / or dental expense.
Those born after January 2, 1951 may still make a deduction, but their medical and dental expenses must exceed 10% of their adjusted gross income. By deducting these expenses, one’s income is lowered. Therefore, the amount of tax they owe is also reduced.
While tax deductions are not a source of funds for eldercare, a reduced tax burden can enable a family to re-allocate resources to help cover the cost of care. When combined with other options, this might make the difference between being able to afford home care or assisted living. Furthermore, lowering one’s adjusted gross income may help make one eligible for other forms of federal and state assistance.
Medical and dental expense deductions should not be confused with Dependent Care Tax Credit. This credit is meant for dependent care expenses the primary taxpayer incurs to enable them to work, or look for work, rather than caring for their dependent.
Tax Deductions vs. Tax Credits
Tax deductions lower your taxable income. So, if your income is $50,000 and you have a $2,000 deduction, then you will pay taxes on $48,000. Tax credits are applied to the taxes you owe. If you owe $3,000 in taxes and you have a credit for $500, then you only have to pay $2,500.
Scenarios for Using this Credit
Medical and dental expenses are deductible in each of the following four tax filing scenarios for those born prior to January 2, 1951. For those born after this date, 7.5% needs to be replaced with 10%.
1) When the care recipient is filing his/her own taxes and their personal annual medical and dental expenses exceed 7.5% of their adjusted gross income.
2) When a married couple is filing jointly and their combined medical and dental expenses exceed 7.5% of their combined adjusted gross income.
3) When a married couple is filing separately. Since the deduction is based on expenses as a percentage of income, splitting income between two individuals and filing separately may yield a greater overall tax reduction.
4) When a family member or caregiver is claiming the care recipient as a dependent, they can combine that individual’s medical and dental expenses with his or her own expenses. If the combined expenses exceed 7.5% of their combined adjusted gross income, they can claim the expenses as a deduction.
Any of these scenarios may result in invalidating other deductions. It is recommended to prepare taxes considering all alternatives (or have a tax professional do so) to determine which approach is most beneficial to the taxpayer and family unit on the whole.
Claiming an Elderly Person as a Dependent
In order to claim an individual who requires care as a dependent, there are two essential qualifications. The tax filer must provide over half of the dependent’s financial support. And the dependent must be related to, or have lived with the tax filer for a full calendar year.
There is an exception to the 50% financial support rule made when two or more individuals, typically family members, together contribute at least 50% of the support for the elderly dependent. In this case, the contributors can prepare a mutually agreed-upon “Multiple Support Declaration.” This allows one of the contributing individuals to claim the elderly as a dependent and deduct that elderly person’s medical expenses. When using a “Multiple Support Declaration”, the tax filer needs only to have contributed 10% of the total. Make note, the individual who is deducting the expenses can only use the amount they personally paid.
When a dependent aging parent is certified chronically ill and following a prescribed plan of care, then the total cost of skilled nursing or assisted living can be included as a Medical Expense.
“Medical and Dental Expenses” include a wide range of expenditures, some of which are not immediately obvious. See IRS Publication 502 for a complete list of qualifying medical and dental expenses. A partial list follows. Worth noting, if a senior is certified as chronically ill, the list of eligible expenses is expanded.
- Medical fees from doctors, laboratories, dentists, assisted living residences, home health care, and hospitals
- Cost of transportation to receive medical care, including ambulance service
- Premiums for health insurance and qualified long term care insurance
- Home modifications costs, such as wheelchair ramps, porch lifts, grab bars, and handrails
- Personal care items, such as disposable briefs, and foods/nutritional supplements for a special diet, as prescribed by a doctor to treat a medical condition
- Cost of prescription drugs
- Entrance fees for assisted living
- Room and board for assisted living if the resident is certified chronically ill by a healthcare professional and is following a prescribed plan of care. Typically, this means that they are unable to perform two activities of daily living (ADLs), such as bathing and dressing, or require supervision due to Alzheimer’s disease or other conditions.
- Medical expenses that are reimbursed by health insurance, Medicare or any other program.
- Payments or distributions out of health savings accounts
- Non-medical care to enable the tax filer to be gainfully employed. However, the taxpayer can receive a tax credit for this through the Child and Dependent Care Credit
- Life insurance premiums
Medical Expense vs. Dependent Care Credit
The cost of home care, used to enable the taxpayer to work outside the home while care is provided for a dependent, can be applied either as a Medical Expense Deduction or using the Dependent Care Credit, but not both. For most families, it is advantageous to apply care expenses, which enable you to be gainfully employed, towards the Dependent Care Credit up to the maximum allowed (as of 2017, up to $3,000 in expenses may be used to calculate the credit), and then apply the remainder of those expenses as Medical Expense deductions. However, this may not always be applicable.
Credit Amounts & Limits
Tax filers can deduct the amount of medical expenses that exceed 7.5% (or 10%, based on the age of the individual) of their adjusted gross income (your AGI is found on form 1040, line 38). Or stated in another way, subtracting 7.5% (.075) of your AGI from your total medical expenses will yield your medical expense deduction.
For example, if your adjusted gross income was $50,000, and your total paid medical expenses were $10,000, your medical expense deduction would be $6,250 as shown in the table below. Assuming a typical tax rate of 16%, the annual tax savings would be approximately $1,000.
||7.5% of AGI
||Medical Expenses – 7.5% of AGI
||Medical Exp. Deduction
||$50,000 x 7.5% = $3,750
||$10,000 – $3,750 = $6250
How to File
Families need to use a Form 2441 to claim the dependent credit and Schedule A for the medical deduction.