Claiming medical bills on taxes

Medical costs can be claimed as adjustments and/or deductions to one's taxable income. That is to say, there are two opportunities tax filers have to lower their taxes and consequently, lower their annual medical costs through tax savings.

Those two ways include tax deductions for  medical expenses within the itemized section of a tax return, i.e. Form 1040, schedule A or as an adjustment through a health savings plan on the adjustments section of form 1040. This article will illustrate how these reductions to taxable income occur and provide tips on using medical expenses in tax filings.

Deducting medical expenses on Form 1040 Schedule A

Medical and dental bills can be claimed on form 1040, Schedule A if the cost of the expenses are in excess of 7.5% of the tax filings adjusted gross income. For example, if the adjusted gross income after adjustments is $38,000.00, medical expenses in excess of $2850.00 are deductible on a schedule A. A household would have to have significant annual medical expenses to benefit from this percentage deduction.

For people with high annual medical expenses, this deduction favors can be beneficial to tax filers with high medical bills and/or income tax brackets. For example, a tax filer who is in the 25% tax bracket can save approximately $250.00 in taxes per $1000 of income in over $30,650 if medical expenses over 7.5% of adjusted gross income. On income levels below the 25% tax bracket, deduction to income as a result of medical expenses will save 10%-15% in tax or lower depending on the income amount.

The range of medical expenses that are deductible on an IRS form 1040, Schedule A is outlined in the IRS instructions of the Schedule A. The allowable medical expenses are quite broad and include but are not limited to, the following expenses, as outlined by the IRS schedule A instruction booklet.

• Supplemental Medicare costs and Medicare pare D premiums
• Medical and Dental Health Insurance premiums
• Self employment health insurance premiums
• Medical examinations
• Hospital care
• Surgery
• Ambulance services
• Medical equipment

Adjusting income through health savings plans

Contributions to health savings plans can also lower taxes because those contributions may lower adjusted gross income. In other words, medical expenses that take the form of contributions to health savings plans may be beneficial to a tax payer as a way of hedging insurance fees with tax savings. To adjust for income contributed to a health savings plan, a form 8889 is required. Instructions and eligibility requirements for a health savings plan adjustment are available through the Internal Revenue Service website.

According to the Internal Revenue Service form 8889 instructions, the contribution limit for a health savings plan's of persons under 55 years of age is currently $2,850.00 for individuals and $5,650.00 for families and the contributions must be made to a "high deductible health plan" or HDHP. The potential savings one can achieve through a Health savings plan adjustment are $427.5 at a flat tax rate of 15% for individuals, and $847.50 for families. The advantages of such adjustable medical expenses may be beneficial in lowering overall medical costs through a tax hedge.

Health coverage tax credits

Health coverage tax credits are available to qualifying individuals and families. Generally, this tax credit is only available to a specific demographic as proscribed the Internal Revenue Service and the potentially eligible groups include 1) persons over 55 and receive pension form the Pension Benefit Guaranty Corporation, 2) the tax filers state of residence provides supplemental income and considers the tax filer to be part of a trade readjustment program and 3) the tax filer is 50 years old or higher and participates in an alternative trade adjustment assistance program.

The above tax credits are specific to age groups and those affected by job losses caused by free trade outsourcing. Participating in such programs is a factor, but not necessarily a sole determinant of eligibility for the health coverage tax credit. The Internal Revenue Service has specific links for the health care tax credit program, one of which is cited at the bottom of this article.

Tips to consider for deducting medical expenses

When making use of medical expenses to lower taxable income there are several techniques that may prove helpful in maximizing the benefits and making full use of the allowable tax deductions. A few tips tax filers may wish to consider when making use of medical expenses are the following:

• Consider Switching Health Plans: A High Deductible Health Plan takes a percentage of monthly premiums and contributes that amount to the Health Savings Account. That balance is used for medical bills and is tax deductible.

• Ask for Co-pay, and deductible receipts: Doctor co-pays and deductible can add up over the course of a year. Keeping track of every co-payment and deductible will help ensure the maximum deduction is made on the tax filing.

• Weigh the benefits: It may be more advantageous to use a different health plan than a high deductible health savings plan. To figure out which plan is better 1) subtract the tax savings from HDHP from annual medical costs using the HDHP, then 2) compare that amount to the premium and annual medical expenses minus any potential tax savings using another health insurance plan.

• Research: Understand how preventative medicine can sometimes lower costs across the board and study which insurance plans are best and have the lowest co-pays and deductibles for the lowest costs. The more cost effective solution will either cost less in terms of annual expenses or yield greater tax savings than the savings achieved through the most cost effective health savings plan.

• Consult: Contacting the IRS at 1-866-829-1040 may be of assistance when one has questions regarding allowable expenses and how those expenses should be adjusted for, deducted or credited. If the information provided by the IRS is not sufficient a tax preparation service may be of use, but of additional cost.

Summary

Tax deductions exist because the creators of tax code determined certain living expenses should not over burden consumers. One such tax "break" is medical expense deductions in excess of 7.5% of one's adjusted gross income and tax adjustments from contributions to a high deductible health savings plan.

In some instances, tax filers participating in specific pension plans administered by the pension benefit guaranty corporation and/or participating in trade readjustment program may qualify for a tax credit.

Benefiting from the tax benefits of medical expenses involves a little analysis of the pros and cons of medical treatments, various health insurance programs, and courses of action pertaining to one's or one's family's health.

Studying the options and the potential tax benefits and weighing those tax benefits against more cost effective insurance plans and health programs can be helpful in achieving the most optimal financial benefit.

The tips in this article provide some guidance but should not be considered more than that as tax filer's health and tax situations tend to be different. However, being aware of the tax benefits and information provided herein, can potentially yield tax savings.

Sources:

1. http://www.irs.gov/pub/irs-pdf/i1040sa.pdf
2. http://www.irs.gov/pub/irs-pdf/i8889.pdf
3. http://www.opm.gov/hsa/HSA_NetAmounts.pdf
4. http://www.irs.gov/individuals/article/0,id=109945,00.html

Income tax: Using the itemized deduction vs standard deduction

Deductions are one of the principal methods of avoiding undue taxation by the U.S. Internal Revenue Service (IRS). As unpleasant as tax filing season may be, it is important to know the benefits and distinctions of each type of tax deduction in detail so as to correctly file taxes and report accurate taxable income. When filing taxes only one or the other of the standard deduction or itemized deductions can be used. Consequently, knowing which tax deductions will yield the more precise taxable income can be worth the time spent deciding which methods is best.

The standard deduction

The standard deduction is a pre-set value appearing on the IRS form 1040 that varies on one's filing status. The filing status includes one's marital and household standing in addition to spousal filing information. The three filing statuses used by the U.S. Internal Revenue Service and corresponding standard deductions are as follows:

• Married Filing Jointly: $10,700.00
• Head of Household: $7,850.00
• Single or Married Filing Separately: $5,350.00

It pays to be married and file a joint tax return if the standard deduction for such filing is higher than itemized deductions, and if filing jointly does not adversely affect one's tax bracket and taxable income to the point of negative benefits. In other words, if the cost of filing as jointly married outweigh the benefits it may be better to file as married filing separately or head of household.

Head of household filing status requires a familial and dependent relationship who both lives with the tax filer and who pays less than half the annual living expenses for the household. More detailed qualification details for this filing status and deduction can be found on pages 13-17 of the form 1040 filing instructions.

The single or married filing separately filing status has the lowest standard deduction and the least impact on taxable income of the three options. This standard deduction is more likely to be compared with the itemized deductions in terms of total deduction to adjusted gross income because it is the smallest. That is to say, the itemized deductions have the greater chance of being larger than the single or married filing separately standard deduction.

The itemized deduction(s)

Itemized deductions are voluntary individual deductions that can be used instead of the standard deduction. Itemized deductions can be filed using a Form 1040 Schedule A-Itemized deductions. Some of the more significant deductions are listed as follows:

• Medical and Dental Expenses over 7.5% of one's adjusted gross income
• State and local income taxes paid or sales tax ex.7.25% in California, 2.5% in Colorado
• Residential Mortgage interest expense
• Charitable donations ex: clothing, cash, equipment
• Employee expenses not paid for by an employer ex: International Travel

If the total itemized deductions are greater than the applicable standard deduction, the itemized deductions will contribute to lower taxable income. Mortgage interest expenses and income tax may yield a significantly large enough deduction to justify using the itemized deductions.

To illustrate the above point, a home with 200 thousand dollar mortgage at 6 percent charges approximately $12,000.00 in mortgage interest expense in its first year not including reverse compounding. This mortgage interest expense alone is higher than the highest standard deduction. Generally, the higher the standard of living a household maintains in terms of income and mortgage taxes and expenses, the more likely it is itemized deductions will be the correct tax filing deduction choice.

Itemized vs standard deduction filing tips

The following tips can help one determine which type of deduction is more likely to yield a lower taxable income. In cases of lower income and standard of living, the standard deduction is more likely to be the correct choice. However, in some cases both ways may come close in terms of dollar amounts of the deductions while in cases of high mortgage interest and taxable income, the itemized may be the better choice.

• Taxable income: Taxable income is the final amount tax will be assessed on. Making this number as low as possible and understanding that it can be reduced via deductions is key to reducing income tax.

• Filing status: Filing status may benefit taxable income if the joint income is lower than the additional deduction. Ex-If one spouse is not working, the additional deduction amount will yield a significantly lower taxable income.

•Audits: Sometimes deductions may trigger IRS audits. Whether the deductions are for business expenses, charitable donations or another purpose, ask for and keep receipts is essential in proving the legitimacy of the deduction in case of audit.

• Sales vs Income tax deductions: Comparing sales tax deductions with income tax deductions using pages A-4, A-11 and A-12 of the form 1040 Schedule A instructions can help identify the higher deductible if any. Sometimes calculations will be necessary to determine which deduction yields the greatest income advantage.

• Charitable contributions: Charitable contributions aren't necessarily beneficial if the donation amount does not lead to a greater amount of saved income tax. Calculating charitable contributions with the potential aim of lowering tax bracket ex. 28 to 25 percent, or 25 to 15 percent is one way to optimize charitable contributions tax deductions.

• Schedule A: Complete a Schedule A even if the standard deduction is believed to be the better choice. This will enable a more accurate comparison than a rough estimate of total itemized deductions.

Taxes can be thought of as the necessary evil that lubricates and maintains the regulatory machinery that keeps a country safe, functional and operational. Nevertheless, not many people if any want to over pay the government during tax filing season. For this reason it can be a good idea to determine which tax deductions are the most exact representation of deductions to one's taxable income.

Source: http://www.irs.gov