GETTING STARTED How to Adjust Your Withholding Track Down Your Tax Records Your Tax Form Checklist MORE... TAX TOOLS   From TaxCut by H&R Block Will you have to pay the alternative minimum tax in 2004?   Kiplinger Tools How much should I put in my flexible spending account? 2004 survey of state tax burdens Sponsored By: Recent Columns Going Into Overtime - Feb. 3, 2005 Don't Delay Starting Your HSA - Jan. 31, 2005 Stocks Still Tops for the Long Term - Jan. 27, 2005 'One for All' Works for IRAs, Too - Jan. 24, 2005 Get Out of Bankrupt Shares While You Can - Jan. 20, 2005 Insuring a Car You Don't Own - Jan. 17, 2005 MORE ... ASK KIM E-MAIL   Sign Up   Now you can have Ask Kim delivered to your inbox three times a week. Sign up now.

ASK KIM
Get a Tax Break for Medical Expenses
by Kimberly Lankford

Under what circumstances can you deduct medical expenses from your taxes?

You can only deduct medical costs that were not covered by insurance or tax-advantaged plans, such as a flexible-spending account or a health savings account.

And you still may not be able to take the deduction even if you have a slew of expenses that qualify. You must itemize your deductions and you can only write off expenses that exceed 7.5% of your adjusted gross income. That means if you're earning $50,000 per year, you can only deduct out-of-pocket medical expenses beyond $3,750. So if you have $5,000 of qualified costs, you're left with a deduction of just $1,250.

But even that partial deduction can make a difference. If you're in the 25% bracket, a $1,250 deduction can lower your tax bill by $313. It's worthwhile to keep the receipts in your tax file throughout the year because you could end up with a surprisingly large deduction if you have a medical emergency or a major expense that isn't covered by insurance, such as fertility treatments, orthodontia, laser eye surgery or any experimental medical procedures that your insurer won't touch.

Once you pass that threshold, you can write off other nonreimbursed expenses that are usually too small to qualify, such as dental treatment, eye exams, contact lenses, glasses, a portion of your premiums for qualified long-term care insurance policies (the amount varies by age), prescription drugs not covered by insurance, the cost of transportation to receive medical care (12 cents per mile if you drive) and many other expenses. For a comprehensive list of which expenses you can deduct, see IRS Publication 502 Medical and Dental Expenses.

Even if you contribute the maximum to your flexible-spending account at work -- generally $2,000 to $3,000 per year -- you still may have some leftover expenses to write off. If one year, for example, you spend $20,000 for two rounds of in vitro fertilization that aren't covered by your health insurance, and you pay for $3,000 of the cost from your flexible-spending account, then you'll still have $17,000 in unreimbursed medical expenses that could qualify for the tax write-off. If you earn $60,000 per year, you can write off any medical expenses beyond $4,500 (7.5% of your adjusted gross income). That still leaves you with $12,500 to write off, which will lower your tax bill by $3,125 if you're in the 25% bracket.