Page Reviewed / Updated - Mar. 2016
Medical and dental expenses can be deducted if their total sum exceeds 7.5% of the tax filer’s adjusted gross income. However, the tax filer, or his or her spouse, must have been born prior to January 2, 1951 (a minimum of 65 years of age) for this deduction. Those born after this date 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 and 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 the Dependent Care Tax Credit, which is meant for dependent care expenses the primary taxpayer incurs to enable them to work instead of caring for their dependent.
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.
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 several 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", which 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.
"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.
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 ($3,000 for 2015), and then apply the remainder of those expenses as Medical Expense deductions. However, this may not always be applicable.
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
|Medical Expenses - 7.5% of AGI||Medical Exp. Deduction||Annual Savings|
|$50,000||$50,000 x 7.5% = $3,750||$10,000||$10,000 - $3,750 = $6250||$6250||$1,000|