This story is part of Taxes 2023, CNET's coverage of the best tax software, tax tips and everything else you need to file your return and track your refund.
If staying healthy burned a hole in your pocket last year, you may be able to get some of that money back.
Deductions are one-off adjustments to your taxable income. When you document them on your tax return, they lower your overall tax burden. Most Americans elect to take the standard deduction, which reduces taxable income by $12,950 for single filers, $19,400 for heads of household and $25,900 for joint filers for the 2022 tax year. However, if you have unique one-time expenses, such as a large medical bill, waiving the standard deduction and itemizing your expenses instead may lead to a bigger refund.
Expenses incurred from COVID-19 follow the same deduction rules as other qualified out-of-pocket medical costs. Medical expenses can be deducted from your federal taxable income for 2022, but only if they exceed 7.5% of your Adjusted Gross Income. "The federal threshold is really high, but a lot of states do have lower limits," said Krystal Pino, a certified public accountant who owns Nomad Tax, a tax consultancy for digital nomads. "So while you might not qualify for an itemized deduction on your federal taxes, you could get them on a state level instead."
Here are some of taxpayers' most common medical deductions, as well as how to itemize similar expenses for yourself if you qualify.
Which medical expenses can be deducted?
Only out-of-pocket expenses that were not reimbursed are eligible for deduction, and these expenses must be legitimate, according to Andrew Griffith, a certified public accountant and associate professor of accounting at Iona University. "They can't be supplements, vitamins, stuff like that," Griffith said, unless they are prescribed by a medical practitioner.
Popular deductible medical and dental expenses include:
- Visits to doctors, dentists, psychologists, surgeons or other specialists.
- Addiction programs for alcohol, drugs or smoking.
- Insulin and other prescription drugs.
- Service animal expenses.
- Dentures, hearing aids, wheelchairs and other equipment issued by medical professionals.
- Hospital stays, which would include hospitalization for COVID-19.
- Vehicle mileage to and from necessary medical appointments.
A complete list of what medical and dental expenses are eligible is available on the IRS website.
How do you deduct medical expenses?
When you elect to itemize your deductions for either your federal or state filing, you'll attach Schedule A to your Form 1040, the standard form for US individual tax returns. Schedule A documents itemized deductions, and "medical and dental expenses" are the first of six categories of deductions you can include on this form.
For each medical expense, you need to include either a copy of the receipt from the medical provider showing you paid the amount or a canceled check from your bank. An explanation of benefits from your health insurance provider doesn't qualify as documentation because it doesn't prove that you actually paid the balance. If your health insurance partially reimbursed a medical expense, include both sets of documentation to prove you paid the difference.
Track end-of-year expenses closely so you don't leave any deductions on the table. "If you incurred medical expenses in 2021, but paid them in 2022, that's deductible for 2022," Griffith said.
How do medical expense deductions differ on federal and state tax returns?
The 7.5% federal threshold for medical expenses is high for many taxpayers. This means that medical deductions only begin to lower your taxable income once they've passed 7.5% of your AGI for the previous tax year.
For example, if someone had an AGI of $60,000 last year, 7.5% of this income would be $4,500. Let's say this taxpayer had $8,000 in out-of-pocket medical expenses. If they document all $8,000 on their Schedule A form, $3,500 of these expenses ($8,000 minus $4,500) would be subtracted from their adjusted gross income. Assuming no other deductions, they would then have a taxable income of $56,500, not $60,000, which would lower their overall tax bill. (Note that, if this was the only itemized deduction this particular taxpayer had, taking the standard deduction of $12,950 instead would yield a bigger refund.)
Some states offer a lower medical expenses threshold to give taxpayers additional relief. In New Jersey, for example, the threshold is 2%. Some states require that you take the same deductions on your state tax return as you did on your federal return, whereas others do not. Check with your specific state's treasury website or work with a local tax professional for details on state-specific medical deductions. "Keep track of those medical expenses the same way you would keep track of any other personal or business expenses," Pino said.
Filing your taxes can quickly become stressful and frantic if you wait until the last minute. It may cost you more money, too. Use this downtime to get yourself organized and you'll have a better shot at maximizing your refund this year.