Medical Expense Deduction Tax Relief

It’s only taken Congress 34 years, but the threshold for claiming a medical expense deduction has finally been made permanent. For 2021 and forevermore, medical expenses above 7.5% of Adjusted Gross Income (AGI) is the law of the land if you itemize on your federal tax return and your total itemized deductions are greater than the standard deduction.

For the last ten years, like a ping pong ball in an Olympic match, the threshold has bounced back-and-forth between 7.5% and 10%. Congress voted on the medical deduction every year.

But the history of the federal medical expense deduction goes way back. It began with the United States Revenue Act of 1942. The law said the deduction was for extraordinary medical expenses that exceeded 5% of AGI. There were no specifics of what “extraordinary” meant. From legislative history, it appears that the deduction was supposed to be temporary to help taxpayers who were making so many sacrifices during World War II.

There were some tweaks to the medical expense deduction in 1944 but the threshold stayed at 5%. In 1954 it was modified again and this time the threshold was lowered to 3% of AGI.

In 1982, as part of the Tax Equity and Fiscal Responsibility Act (TEFRA), the threshold was increased back to %5 of AGI and the government got a little more specific about what defined medical expenses. Nonprescription drugs, which had been allowed before, were eliminated from the acceptable list.

The Tax Reform Act of 1986 brought the medical expense deduction floor up to 7.5% of AGI. That threshold stayed in place until Obamacare, officially known as The Affordable Care Act, sent medical insurance premiums through the roof and raised the medical expense deduction floor to 10%.

In 2017, The Tax Cuts and Jobs Act (TCJA) was passed. As part of TCJA, the medical expense deduction was dropped back to 7.5% of AGI for 2017 and 2018. It was supposed to go back up to 10% for 2019 and 2020, but Congress, in its annual vote on the deduction, left it at 7.5% for those years with a definite increase back to 10% in 2021.

Finally, in December 2020 as part of the $1.4 trillion spending bill passed by Congress, the medical expense deduction was permanently set at 7.5% of AGI.

Now that you know where the goalposts are when it comes to deducting medical expenses, what can you deduct? IRS Publication 502 has the full list, but here’s a synopsis.

  • Payments to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and other medical practitioners
  • Hospital and nursing home care
  • Acupuncture
  • Addiction programs, including smoking cessation
  • Weight-loss programs for doctor-diagnosed diseases, including obesity (but diet food and health club dues usually don’t count)
  • Insulin and prescription drugs
  • Admission and transportation to medical conferences about diseases that you, your spouse, or your dependents have (but meals and lodging don’t count)
  • Dentures, reading or prescription eyeglasses, contacts, hearing aids, crutches, wheelchairs, and service animals
  • Transportation costs to and from medical care (mileage, tolls, and parking)
  • Insurance premiums for medical care or long-term care insurance if they’re not paid by your employer and you pay out of pocket after taxes
  • Medicare Part B & D premiums, Medicare Advantage, and Medicare supplement premiums

You can claim medical expenses paid for you, your spouse, and your dependents. You report your itemized deductions on Schedule A of your 1040 federal income tax return. And if your total itemized deductions are greater than the standard deduction, you get to deduct all medical expenses above 7.5% of your AGI.

So, be a great record keeper. Hang on to medical bills, pharmacy receipts, statements about medical insurance premiums. Even go back to your medical providers and ask for a printout of what you spent with them during the year. Keep track of everything. As my dad used to say, if you’re entitled to a deduction, take it!