The Most Powerful Retirement and Day to Day Account
The Health Savings Account (HSA), its related tax breaks, and ability to take distributions as needed make this one of the most powerful retirement and day to day savings accounts. It is often spoken about very little as an awesome tool in personal finance circles and most people at my office still don’t understand them after being around for several years. This post will take a deep dive into the powerful Health Savings Account (HSA).
What is It?
If you have a high deductible health plan in the U.S. you likely have a Health Savings Account (HSA) given employers, finance companies and employees pushing for these accounts. You also may have multiple options with and without and Health Savings Account (HSA). I have done the math on my wife and I’s respective healthcare options multiple years in a row – the high deductible Health Savings Account (HSA) option always wins hands down and we have been in one for over 6 years now.
The account essentially allows you to:
- Put cash into the account on a tax free basis (reduces your taxable income)
- Allows you to pull cash out tax free if for qualified medical expenses
- Keep cash for future years if you do not use in the current year
- Invest funds into stocks and bonds just like a 401K
The Prioritization Answer First
As everyone knows and I discussed in Cash Flow Faucets – Your Paycheck – Lessons in Life Management everyone should have all their tax Advantage Accounts Maxed Out.
The reality is that most people can’t max out all accounts all the time – this may be temporary or something you can’t mathematically make work so you have to prioritize.
As I will outline below – Your view of the Health Savings Account (HSA) should not be “should I put money in or not,” it should be “This is part of my retirement strategy and I am going to fund this account as it is more powerful than my 401k account.”
The Preferred Order between your 401K and Health Savings Account (HSA) if your cash flow is restricted should be:
- Put in minimum to your Health Savings Account (HSA) to get company match if you get one
- Put in minimum to your 401K to get company match
- Max out your Health Savings Account (HSA) <— Point of this Post
- Then Max out your 401K
- Then Max out any Roth IRA and 401K accounts if you have funds left over
Reason #1 To Max Out Health Savings Account (HSA): You never want to be in a position to not be able to pay for healthcare
You only live once and so does your family…. you DO NOT want to ever be in a position that you cannot afford healthcare expenses. This gets more important as you older. The main cost most of us face before and during retirement is healthcare…. you need to be in a good position to cover your costs!
If you have done any reading on healthcare or why a lot of people in debt – it’s due to healthcare bills.
If you insurance doesn’t pay for the medical bill of equipment – that does not limit or restrict your ability to use the funds! Health Savings Account (HSA) usability is governed by the IRS – not your healthcare provider!
Reason #2 To Max Out Health Savings Account (HSA): You can use your Health Savings Account (HSA)for anyone in your family
You can use your Health Savings Account (HSA) to pay for the qualified medical expenses of anyone you claim on your taxes – regardless of how your family’s health care is structured.
Reason #3 To Max Out Health Savings Account (HSA): Discount on your health care expenses
You get a discount based on your combined state and federal income tax bracket. Health Savings Account (HSA) contributions are tax deductible so any funds used are skipping the tax liability!
If you get hit with a $1,000 healthcare bill and your combined state and federal rate is 20%…. you have implied savings of $200 by using your Health Savings Account (HSA) (you never paid the $200 of tax on this $1,000 of earnings but would have to pay the $200 if you didn’t use the Health Savings Account (HSA)).
When you use your Health Savings Account (HSA), you are cashing in a percent coupon for your health care expenses. The percent is driven by your tax bracket….. the more you make the more this is worth.
Reason #4 To Max Out Health Savings Account (HSA): You get to keep the money in your Health Savings Account (HSA) and can invest like a 401K
As the name implies – you keep the money no matter what as this is a savings account. No use it or lose it issue here even if you switch employers or health plans.
All Health Savings Accounts (HSAs) now have standard investment options for your principle: S&P 500 funds, bond funds, etc. Some account providers allow you to invest directly into securities as well. If you have a balance – it should be invested!
Reason #5 To Max Out Health Savings Account (HSA); Your Health Savings Account (HSA) turns into a 401K at 65
A common issue I hear at work is the risk of having too much in the account.
While the age limit may change in the future at age 65 currently, Health Savings Account (HSA) distributions can also be used for expenses other than qualified medical expenses without penalty; however, they are subject to income tax just like a 401K would be.
I DO NOT recommend using the funds for non medical expenses as I will explain below.
Reason #6 To Max Out Health Savings Account (HSA): If You Really Need the Money
If you really need the money, you can still take the cash out for nonqualified medical expenses before age 65. But beware: they will be taxed as income AND subject to a 20% penalty. This is the same as a 401K except the penalty from a 401K is 10%.
I DO NOT recommend using the funds for non medical expenses as I will explain below.
Reason #7 To Max Out Health Savings Account (HSA): Part of Your Retirement Strategy ****** The Most Important Reason******
Having tax free access to funds for healthcare expense in retirement should be everyone’s goal… the account is MORE powerful than your 401k because your 401K account still needs to be taxed!
As I stated above and why you should max this account out: Your view of this account should not be “should I put money in or not,” it should be “This is part of my retirement strategy and I am going to fund this account as it is more powerful than my 401k account.”
I advise you to review the covetable expenses below – they even include nursing home fees and other common “old people” expenses.
Deposit timing
If you have payroll contributions, the timing will be determined by your payroll calendar. Generally, your funds are available within one business day of deposit. Sign in to your account to check your balance.
2018 limits:
- Individual coverage — $3,450
- Family coverage — $6,900
- Age 55+ — additional $1,000 catch-up contribution, meaning you can deposit an additional $1,000 per year. If your spouse is also 55 or older, he or she may establish a separate Health Savings Account (HSA) and make a “catch-up” contribution to that account.
2019 limits:
- Individual coverage — $3,500
- Family coverage — $7,000
- Age 55+ — additional $1,000 catch-up contribution, meaning you can deposit an additional $1,000 per year. If your spouse is also 55 or older, he or she may establish a separate Health Savings Account (HSA) and make a “catch-up” contribution to that account.
State Taxes – Some States Didn’t Give Everyone 100% of the Benefit
Eligible Health Savings Account (HSA) contributions are taxed by these states (If your State Is Not Listed – no State Tax):
California
New Jersey
Health Savings Account (HSA) earnings (but not eligible contributions) are taxed by these states:
New Hampshire
Tennessee
Consult your financial advisor or state department of revenue for more information Or use a tax advisor software like Turbo Tax! Turbo Tax: The Number 1 Tax Software
Getting Reimbursed
Your account administrator at your company will give you procedures to either:
- Pay out of the Health Savings Account (HSA) directly
- Reimburse yourself
I always do #2 so I can get my reward points on my credit card as I discussed in Making Money Everytime You Buy Something.
Keep your receipts!!!! My Health Savings Account (HSA) provider allows me to store a copy of the receipt on my app when I seek reimbursement and has been my go to organization besides the techniques I outlined here: Managing Your Finances – De-stressing With Some Organization
Strategy Vetting
There are four strategies for an Health Savings Account (HSA):
- Use the funds in the account for medical expenses as they come – invest the remaining principle
- Don’t use any of the funds until retirement
- Somewhere in between #1 and #2 above
- Pay for medical bills with other funds, Save all your receipts, and extract the funds in lump sums in retirement after your balance grows. I think this is on shaky footing as I describe below.
I utilize strategy number 1 because I heavily withhold on all of my accounts as I described here: Cash Flow Faucets
I eventually want to be at Strategy #2 but cash flow doesn’t support it right now. I am still adding to my balance so I am still successful.
Strategy #4 I have seen on various blogs but I think this is very very risky and question how you could claim out of period reimbursement as that is not the spirit of the law. I have to imagine with challenges on the national debt and future analytic abilities of the IRS in the future that this loop hole will be closed if this is even open. I do not recommend this strategy.
In Recap
This is a BIG post and I have tried to throw a lot into it so everyone (including myself) has one go to reference. I hope you have a better understanding of how awesome of a retirement account as well as a general use medical savings account this is. If you don’t have an Health Savings Account (HSA) – push your employer for one or your insurance company to give you an option with one!
I am not a tax professional so please seek additional advice if you have more questions or if you are unsure if this post applies to you. I highly recommend Turbo Tax to help assist you in any of your tax journeys! Turbo Tax: The Number 1 Tax Software
Reference What Are Qualified Expenses?
IRS Publication 502 defines these expenses pretty clearly. I have pulled over the excerpt below which is pretty clear. You would be surprised what qualifies!
Abortion
You can include in medical expenses the amount you pay for a legal abortion.
Acupuncture
You can include in medical expenses the amount you pay for acupuncture.
Alcoholism
You can include in medical expenses amounts you pay for an inpatient’s treatment at a therapeutic center for alcohol addiction. This includes meals and lodging provided by the center during treatment.
You can also include in medical expenses amounts you pay for transportation to and from Alcoholics Anonymous meetings in your community if the attendance is pursuant to medical advice that membership in Alcoholics Anonymous is necessary for the treatment of a disease involving the excessive use of alcoholic liquors.
Ambulance
You can include in medical expenses amounts you pay for ambulance service.
Artificial Limb
You can include in medical expenses the amount you pay for an artificial limb.
Artificial Teeth
You can include in medical expenses the amount you pay for artificial teeth.
Bandages
You can include in medical expenses the cost of medical supplies such as bandages.
Birth Control Pills
You can include in medical expenses the amount you pay for birth control pills prescribed by a doctor.
Body Scan
You can include in medical expenses the cost of an electronic body scan.
Braille Books and Magazines
You can include in medical expenses the part of the cost of Braille books and magazines for use by a visually impaired person that is more than the cost of regular printed editions.
Breast Pumps and Supplies
You can include in medical expenses the cost of breast pumps and supplies that assist lactation.
Breast Reconstruction Surgery
You can include in medical expenses the amounts you pay for breast reconstruction surgery, as well as breast prosthesis, following a mastectomy for cancer.
Capital Expenses
You can include in medical expenses amounts you pay for special equipment installed in a home, or for improvements, if their main purpose is medical care for you, your spouse, or your dependent. The cost of permanent improvements that increase the value of your property may be partly included as a medical expense. The cost of the improvement is reduced by the increase in the value of your property. The difference is a medical expense. If the value of your property isn’t increased by the improvement, the entire cost is included as a medical expense.
Certain improvements made to accommodate a home to your disabled condition, or that of your spouse or your dependents who live with you, don’t usually increase the value of the home and the cost can be included in full as medical expenses. These improvements include, but aren’t limited to, the following items.
- Constructing entrance or exit ramps for your home.
- Widening doorways at entrances or exits to your home.
- Widening or otherwise modifying hallways and interior doorways.
- Installing railings, support bars, or other modifications to bathrooms.
- Lowering or modifying kitchen cabinets and equipment.
- Moving or modifying electrical outlets and fixtures.
- Installing porch lifts and other forms of lifts (but elevators generally add value to the house).
- Modifying fire alarms, smoke detectors, and other warning systems.
- Modifying stairways.
- Adding handrails or grab bars anywhere (whether or not in bathrooms).
- Modifying hardware on doors.
- Modifying areas in front of entrance and exit doorways.
- Grading the ground to provide access to the residence.
Only reasonable costs to accommodate a home to a disabled condition are considered medical care. Additional costs for personal motives, such as for architectural or aesthetic reasons, aren’t medical expenses.
The IRS has a Capital expense worksheet. Use Worksheet A to figure the amount of your capital expense to include in your medical expenses.
Car
You can include in medical expenses the cost of special hand controls and other special equipment installed in a car for the use of a person with a disability.
Special design. You can include in medical expenses the difference between the cost of a regular car and a car specially designed to hold a wheelchair.
Cost of operation. The includible costs of using a car for medical reasons are explained under transportation, later.
Chiropractor
You can include in medical expenses fees you pay to a chiropractor for medical care.
Christian Science Practitioner
You can include in medical expenses fees you pay to Christian Science practitioners for medical care.
Contact Lenses
You can include in medical expenses amounts you pay for contact lenses needed for medical reasons. You can also include the cost of equipment and materials required for using contact lenses, such as saline solution and enzyme cleaner.
Crutches
You can include in medical expenses the amount you pay to buy or rent crutches.
Dental Treatment
You can include in medical expenses the amounts you pay for the prevention and alleviation of dental disease. Preventive treatment includes the services of a dental hygienist or dentist for such procedures as teeth cleaning, the application of sealants, and fluoride treatments to prevent tooth decay. Treatment to alleviate dental disease includes services of a dentist for procedures such as X-rays, fillings, braces, extractions, dentures, and other dental ailments.
Diagnostic Devices
You can include in medical expenses the cost of devices used in diagnosing and treating illness and disease.
Example.
You have diabetes and use a blood sugar test kit to monitor your blood sugar level. You can include the cost of the blood sugar test kit in your medical expenses.
Disabled Dependent Care Expenses
Some disabled dependent care expenses may qualify as either:
• Medical expenses, or
• Work-related expenses for purposes of taking a credit for dependent care. See Pub. 503.
You can choose to apply them either way as long as you don’t use the same expenses to claim both a credit and a medical expense deduction.
Drug Addiction
You can include in medical expenses amounts you pay for an inpatient’s treatment at a therapeutic center for drug addiction. This includes meals and lodging at the center during treatment.
Eye Exam
You can include in medical expenses the amount you pay for eye examinations.
Eyeglasses
You can include in medical expenses amounts you pay for eyeglasses and contact lenses needed for medical reasons.
Eye Surgery
You can include in medical expenses the amount you pay for eye surgery to treat defective vision, such as laser eye surgery or radial keratotomy.
Fertility Enhancement
You can include in medical expenses the cost of the following procedures to overcome an inability to have children.
• Procedures such as in vitro fertilization (including temporary storage of eggs or sperm).
• Surgery, including an operation to reverse prior surgery that prevented the person operated on from having children.
Guide Dog or Other Service Animal
You can include in medical expenses the costs of buying, training, and maintaining a guide dog or other service animal to assist a visually impaired or hearing disabled person, or a person with other physical disabilities. In general, this includes any costs, such as food, grooming, and veterinary care, incurred in maintaining the health and vitality of the service animal so that it may perform its duties.
Health Institute
You can include in medical expenses fees you pay for treatment at a health institute only if the treatment is prescribed by a physician and the physician issues a statement that the treatment is necessary to alleviate a physical or mental disability or illness of the individual receiving the treatment.
Health Maintenance Organization (HMO)
You can include in medical expenses amounts you pay to entitle you, your spouse, or a dependent to receive medical care from an HMO. These amounts are treated as medical insurance premiums.
Hearing Aids
You can include in medical expenses the cost of a hearing aid and batteries, repairs, and maintenance needed to operate it.
Hospital Services
You can include in medical expenses amounts you pay for the cost of inpatient care at a hospital or similar institution if a principal reason for being there is to receive medical care. This includes amounts paid for meals and lodging.
Insurance Premiums
You can include in medical expenses insurance premiums you pay for policies that cover medical care. You can’t include in medical expenses insurance premiums that were paid and for which you are claiming a credit or deduction. Medical care policies can provide payment for treatment that includes:
• Hospitalization, surgical services, X-rays,
• Prescription drugs and insulin,
• Dental care,
• Replacement of lost or damaged contact lenses, and
• Long-term care (subject to additional limitations).
If you have a policy that provides payments for other than medical care, you can include the premiums for the medical care part of the policy if the charge for the medical part is reasonable. The cost of the medical part must be separately stated in the insurance contract or given to you in a separate statement.
Health Coverage Tax Credit (HCTC)
If you were an eligible trade adjustment assistance (TAA) recipient, an alternative TAA (ATAA) recipient, reemployment TAA (RTAA) recipient, or Pension Benefit Guaranty Corporation (PBGC) payee, you must complete Form 8885 before completing Schedule A, line 1. When figuring the amount of insurance premiums you can deduct on Schedule A, don’t include any of the following.
• Any amounts you included on Form 8885, line 4, or on Form 14095, The Health Coverage Tax Credit (HCTC) Reimbursement Request Form, to receive a reimbursement of the HCTC during the year,
• Any qualified health insurance coverage premiums you paid to “U.S. Treasury–HCTC” for eligible coverage months for which you received the benefit of the advance monthly payment program, or
• Any advance monthly payments from your health plan administrator received from the IRS, as shown on Form 1099-H, Health Coverage Tax credit (HCTC) Advance Payments.
If advance payments of the premium tax credit were made or you are eligible for both the premium tax credit and the HCTC and elect to take the HCTC, see the Instructions for Form 8885 to see how to figure your credit.
Employer-Sponsored Health Insurance Plan
Don’t include in your medical and dental expenses any insurance premiums paid by an employer-sponsored health insurance plan unless the premiums are included on your Form W-2, Wage and Tax Statement. Also, don’t include any other medical and dental expenses paid by the plan unless the amount paid is included on your Form W-2.
Example.
You are a federal employee participating in the premium conversion plan of the Federal Employee Health Benefits (FEHB) program. Your share of the FEHB premium is paid by making a pre-tax reduction in your salary. Because you are an employee whose insurance premiums are paid with money that is never included in your gross income, you can’t deduct the premiums paid with that money.
Long-term care services. Contributions made by your employer to provide coverage for qualified long-term care services under a flexible spending or similar arrangement must be included in your income. This amount will be reported as wages on your Form W-2.
Retired public safety officers. If you are a retired public safety officer, don’t include as medical expenses any health or long-term care insurance premiums that you elected to have paid with tax-free distributions from a retirement plan. This applies only to distributions that would otherwise be included in income.
Health reimbursement arrangement (HRA). If you have medical expenses that are reimbursed by a health reimbursement arrangement, you can’t include those expenses in your medical expenses. This is because an HRA is funded solely by the employer.
Medicare A
If you are covered under social security (or if you are a government employee who paid Medicare tax), you are enrolled in Medicare A. The payroll tax paid for Medicare A isn’t a medical expense.
If you aren’t covered under social security (or weren’t a government employee who paid Medicare tax), you can voluntarily enroll in Medicare A. In this situation you can include the premiums you paid for Medicare A as a medical expense.
Medicare B
Medicare B is a supplemental medical insurance. Premiums you pay for Medicare B are a medical expense. Check the information you received from the Social Security Administration to find out your premium.
Medicare D
Medicare D is a voluntary prescription drug insurance program for persons with Medicare A or B. You can include as a medical expense premiums you pay for Medicare D.
Prepaid Insurance Premiums
Premiums you pay before you are age 65 for insurance for medical care for yourself, your spouse, or your dependents after you reach age 65 are medical care expenses in the year paid if they are:
- Payable in equal yearly installments or more often, and
- Payable for at least 10 years, or until you reach age 65 (but not for less than 5 years).
Unused Sick Leave Used To Pay Premiums
You must include in gross income cash payments you receive at the time of retirement for unused sick leave. You also must include in gross income the value of unused sick leave that, at your option, your employer applies to the cost of your continuing participation in your employer’s health plan after you retire. You can include this cost of continuing participation in the health plan as a medical expense.
If you participate in a health plan where your employer automatically applies the value of unused sick leave to the cost of your continuing participation in the health plan (and you don’t have the option to receive cash), don’t include the value of the unused sick leave in gross income. You can’t include this cost of continuing participation in that health plan as a medical expense.
Insurance Premiums You Can’t Include
You can’t include premiums you pay for:
• Life insurance policies,
• Policies providing payment for loss of earnings,
• Policies for loss of life, limb, sight, etc.,
• Policies that pay you a guaranteed amount each week for a stated number of weeks if you are hospitalized for sickness or injury,
• The part of your car insurance that provides medical insurance coverage for all persons injured in or by your car because the part of the premium providing insurance for you, your spouse, and your dependents isn’t stated separately from the part of the premium providing insurance for medical care for others, or
• Health or long-term care insurance if you elected to pay these premiums with tax-free distributions from a retirement plan made directly to the insurance provider and these distributions would otherwise have been included in income.
Taxes imposed by any governmental unit, such as Medicare taxes, aren’t insurance premiums.
Coverage for nondependents. Generally, you can’t deduct any additional premium you pay as the result of including on your policy someone who isn’t your spouse or dependent, even if that person is your child under age 27. However, you can deduct the additional premium if that person is:
• Your child whom you don’t claim as a dependent because of the rules for children of divorced or separated parents,
• Any person you could have claimed as a dependent on your return except that person received $4,050 or more of gross income or filed a joint return, or
• Any person you could have claimed as a dependent except that you, or your spouse if filing jointly, can be claimed as a dependent on someone else’s 2017 return.
Also, if you had family coverage when you added this individual to your policy and your premiums didn’t increase, you can enter on Schedule A (Form 1040) the full amount of your medical and dental insurance premiums.
Intellectually and Developmentally Disabled, Special Home for
You can include in medical expenses the cost of keeping a person who is intellectually and developmentally disabled in a special home, not the home of a relative, on the recommendation of a psychiatrist to help the person adjust from life in a mental hospital to community living.
Laboratory Fees
You can include in medical expenses the amounts you pay for laboratory fees that are part of medical care.
Lead-Based Paint Removal
You can include in medical expenses the cost of removing lead-based paints from surfaces in your home to prevent a child who has or had lead poisoning from eating the paint. These surfaces must be in poor repair (peeling or cracking) or within the child’s reach. The cost of repainting the scraped area isn’t a medical expense.
If, instead of removing the paint, you cover the area with wallboard or paneling, treat these items as capital expenses. Don’t include the cost of painting the wallboard as a medical expense.
Legal Fees
You can include in medical expenses legal fees you paid that are necessary to authorize treatment for mental illness. However, you can’t include in medical expenses fees for the management of a guardianship estate, fees for conducting the affairs of the person being treated, or other fees that aren’t necessary for medical care.
Lifetime Care—Advance Payments
You can include in medical expenses a part of a life-care fee or “founder’s fee” you pay either monthly or as a lump sum under an agreement with a retirement home. The part of the payment you include is the amount properly allocable to medical care. The agreement must require that you pay a specific fee as a condition for the home’s promise to provide lifetime care that includes medical care. You can use a statement from the retirement home to prove the amount properly allocable to medical care. The statement must be based either on the home’s prior experience or on information from a comparable home.
Dependents with disabilities.
You can include in medical expenses advance payments to a private institution for lifetime care, treatment, and training of your physically or mentally impaired child upon your death or when you become unable to provide care. The payments must be a condition for the institution’s future acceptance of your child and must not be refundable.
Payments for future medical care.
Generally, you can’t include in medical expenses current payments for medical care (including medical insurance) to be provided substantially beyond the end of the year. This rule doesn’t apply in situations where the future care is purchased in connection with obtaining lifetime care of the type described earlier.
Lodging
You can include in medical expenses the cost of meals and lodging at a hospital or similar institution if a principal reason for being there is to receive medical care.
You may be able to include in medical expenses the cost of lodging not provided in a hospital or similar institution. You can include the cost of such lodging while away from home if all of the following requirements are met.
- The lodging is primarily for and essential to medical care.
- The medical care is provided by a doctor in a licensed hospital or in a medical care facility related to, or the equivalent of, a licensed hospital.
- The lodging isn’t lavish or extravagant under the circumstances.
- There is no significant element of personal pleasure, recreation, or vacation in the travel away from home.
The amount you include in medical expenses for lodging can’t be more than $50 for each night for each person. You can include lodging for a person traveling with the person receiving the medical care. For example, if a parent is traveling with a sick child, up to $100 per night can be included as a medical expense for lodging. Meals aren’t included.
Don’t include the cost of lodging while away from home for medical treatment if that treatment isn’t received from a doctor in a licensed hospital or in a medical care facility related to, or the equivalent of, a licensed hospital or if that lodging isn’t primarily for or essential to the medical care received.
Long-Term Care
You can include in medical expenses amounts paid for qualified long-term care services and premiums paid for qualified long-term care insurance contracts.
Qualified Long-Term Care Services
Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services (defined later) that are:
- Required by a chronically ill individual, and
- Provided pursuant to a plan of care prescribed by a licensed health care practitioner.
Chronically ill individual.
An individual is chronically ill if, within the previous 12 months, a licensed health care practitioner has certified that the individual meets either of the following descriptions.
- He or she is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.
- He or she requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.
Maintenance and personal care services. Maintenance or personal care services is care which has as its primary purpose the providing of a chronically ill individual with needed assistance with his or her disabilities (including protection from threats to health and safety due to severe cognitive impairment).
Qualified Long-Term Care Insurance Contracts
A qualified long-term care insurance contract is an insurance contract that provides only coverage of qualified long-term care services. The contract must:
- Be guaranteed renewable,
- Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed,
- Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract must be used only to reduce future premiums or increase future benefits, and
- Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer, or the contract makes per diem or other periodic payments without regard to expenses.
The amount of qualified long-term care premiums you can include is limited. You can include the following as medical expenses on Schedule A (Form 1040).
Note. There are limits on premiums for each person.
Also, if you are an eligible retired public safety officer, you can’t include premiums for long-term care insurance if you elected to pay these premiums with tax-free distributions from a qualified retirement plan made directly to the insurance provider and these distributions would otherwise have been included in your income.
Meals
You can include in medical expenses the cost of meals at a hospital or similar institution if a principal reason for being there is to get medical care.
You can’t include in medical expenses the cost of meals that aren’t part of inpatient care.
Medical Conferences
You can include in medical expenses amounts paid for admission and transportation to a medical conference if the medical conference concerns the chronic illness of yourself, your spouse, or your dependent. The costs of the medical conference must be primarily for and necessary to the medical care of you, your spouse, or your dependent. The majority of the time spent at the conference must be spent attending sessions on medical information.
The cost of meals and lodging while attending the conference isn’t deductible as a medical expense.
Medical Information Plan
You can include in medical expenses amounts paid to a plan that keeps medical information in a computer data bank and retrieves and furnishes the information upon request to an attending physician.
Medicines
You can include in medical expenses amounts you pay for prescribed medicines and drugs. A prescribed drug is one that requires a prescription by a doctor for its use by an individual. You can also include amounts you pay for insulin. Except for insulin, you can’t include in medical expenses amounts you pay for a drug that isn’t prescribed.
Nursing Home
You can include in medical expenses the cost of medical care in a nursing home, home for the aged, or similar institution, for yourself, your spouse, or your dependents. This includes the cost of meals and lodging in the home if a principal reason for being there is to get medical care.
Don’t include the cost of meals and lodging if the reason for being in the home is personal. You can, however, include in medical expenses the part of the cost that is for medical or nursing care.
Nursing Services
You can include in medical expenses wages and other amounts you pay for nursing services. The services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. This includes services connected with caring for the patient’s condition, such as giving medication or changing dressings, as well as bathing and grooming the patient. These services can be provided in your home or another care facility.
Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, amounts paid to the attendant must be divided between the time spent performing household and personal services and the time spent for nursing services. For example, because of your medical condition you pay a visiting nurse $300 per week for medical and household services. She spends 10% of her time doing household services such as washing dishes and laundry. You can include only $270 per week as medical expenses. The $30 (10% × $300) allocated to household services can’t be included. However, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses. Additionally, certain expenses for household services or for the care of a qualifying individual incurred to allow you to work may qualify for the child and dependent care credit. See Pub. 503.
You can also include in medical expenses part of the amount you pay for that attendant’s meals. Divide the food expense among the household members to find the cost of the attendant’s food. Then divide that cost in the same manner as in the preceding paragraph. If you had to pay additional amounts for household upkeep because of the attendant, you can include the extra amounts with your medical expenses. This includes extra rent or utilities you pay because you moved to a larger apartment to provide space for the attendant.
Employment taxes.
You can include as a medical expense social security tax, FUTA, Medicare tax, and state employment taxes you pay for an attendant who provides medical care. If the attendant also provides personal and household services, you can include as a medical expense only the amount of employment taxes paid for medical services as explained earlier. For information on employment tax responsibilities of household employers, see Pub. 926.
Operations
You can include in medical expenses amounts you pay for legal operations that aren’t for unnecessary cosmetic surgery.
Osteopath
You can include in medical expenses amounts you pay to an osteopath for medical care.
Oxygen
You can include in medical expenses amounts you pay for oxygen and oxygen equipment to relieve breathing problems caused by a medical condition.
Physical Examination
You can include in medical expenses the amount you pay for an annual physical examination and diagnostic tests by a physician. You don’t have to be ill at the time of the examination.
Pregnancy Test Kit
You can include in medical expenses the amount you pay to purchase a pregnancy test kit to determine if you are pregnant.
Premium Tax Credit
You can’t include in medical expenses the amount of health insurance premiums paid by or through the premium tax credit. You also can’t include in medical expenses any amount of advance payments of the premium tax credit made that you did not have to pay back. However, any amount of advance payments of the premium tax credit that you did have to pay back can be included in medical expenses.
Example 1.
Amy is under age 65 and unmarried. The cost of her health insurance premiums in 2017 is $8,700. Advance payments of the premium tax credit of $4,200 are made to the insurance company and Amy pays premiums of $4,500. On her 2017 tax return, Amy is allowed a premium tax credit of $3,600 and must repay $600 excess advance credit payments (which is less than the repayment limitation). Amy is treated as paying $5,100 ($8,700 less the allowed premium tax credit of $3,600) for health insurance premiums in 2017. Because $5,100 is more than 10% of Amy’s AGI, when she fills out her Schedule A, she enters $5,100 on line 1.
Example 2.
The facts are the same as in Example 1, except Amy is allowed a premium tax credit of $4,900 on her tax return and receives a net premium tax credit of $700. Amy is treated as paying $3,800 ($8,700 less the allowed premium tax credit of $4,900) for health insurance premiums in 2017. Because $3,800 is more than 10% of Amy’s AGI, when she fills out her Schedule A, she enters $3,800 on line 1.
Prosthesis
See Artificial Limb and Breast Reconstruction, earlier.
Psychiatric Care
You can include in medical expenses amounts you pay for psychiatric care. This includes the cost of supporting a mentally ill dependent at a specially equipped medical center where the dependent receives medical care. See Psychoanalysis, next, and Transportation, later.
Psychoanalysis
You can include in medical expenses payments for psychoanalysis. However, you can’t include payments for psychoanalysis that is part of required training to be a psychoanalyst.
Psychologist
You can include in medical expenses amounts you pay to a psychologist for medical care.
Special Education
You can include in medical expenses fees you pay on a doctor’s recommendation for a child’s tutoring by a teacher who is specially trained and qualified to work with children who have learning disabilities caused by mental or physical impairments, including nervous system disorders.
You can include in medical expenses the cost (tuition, meals, and lodging) of attending a school that furnishes special education to help a child to overcome learning disabilities. For expenses to be deductible, a doctor must recommend that the child attend the school. Overcoming the learning disabilities must be a principal reason for attending the school, and any ordinary education received must be incidental to the special education provided. Special education includes:
• Teaching Braille to a visually impaired person,
• Teaching lip reading to a hearing disabled person, or
• Giving remedial language training to correct a condition caused by a birth defect.
You can’t include in medical expenses the cost of sending a child with behavioral problems to a school where the course of study and the disciplinary methods have a beneficial effect on the child’s attitude if the availability of medical care in the school isn’t a principal reason for sending the student there.
Sterilization
You can include in medical expenses the cost of a legal sterilization (a legally performed operation to make a person unable to have children). Also see Vasectomy, later.
Stop-Smoking Programs
You can include in medical expenses amounts you pay for a program to stop smoking. However, you can’t include in medical expenses amounts you pay for drugs that don’t require a prescription, such as nicotine gum or patches, that are designed to help stop smoking.
Surgery
See Operations, earlier.
Telephone
You can include in medical expenses the cost of special telephone equipment that lets a person who is deaf, hard of hearing, or has a speech disability communicate over a regular telephone. This includes teletypewriter (TTY) and telecommunications device for the deaf (TDD) equipment. You can also include the cost of repairing the equipment.
Television
You can include in medical expenses the cost of equipment that displays the audio part of television programs as subtitles for persons with a hearing disability. This may be the cost of an adapter that attaches to a regular set. It also may be the part of the cost of a specially equipped television that exceeds the cost of the same model regular television set.
Therapy
You can include in medical expenses amounts you pay for therapy received as medical treatment.
Transplants
You can include in medical expenses amounts paid for medical care you receive because you are a donor or a possible donor of a kidney or other organ. This includes transportation.
You can include any expenses you pay for the medical care of a donor in connection with the donating of an organ. This includes transportation.
Transportation
You can include in medical expenses amounts paid for transportation primarily for, and essential to, medical care.
You can include:
• Bus, taxi, train, or plane fares or ambulance service,
• Transportation expenses of a parent who must go with a child who needs medical care,
• Transportation expenses of a nurse or other person who can give injections, medications, or other treatment required by a patient who is traveling to get medical care and is unable to travel alone, and
• Transportation expenses for regular visits to see a mentally ill dependent, if these visits are recommended as a part of treatment.
Car expenses.
You can include out-of-pocket expenses, such as the cost of gas and oil, when you use a car for medical reasons. You can’t include depreciation, insurance, general repair, or maintenance expenses.
If you don’t want to use your actual expenses for 2017, you can use the standard medical mileage rate of 17 cents a mile.
You can also include parking fees and tolls. You can add these fees and tolls to your medical expenses whether you use actual expenses or the standard mileage rate.
Example.
In 2017, Bill Jones drove 2,800 miles for medical reasons. He spent $400 for gas, $30 for oil, and $100 for tolls and parking. He wants to figure the amount he can include in medical expenses both ways to see which gives him the greater deduction.
He figures the actual expenses first. He adds the $400 for gas, the $30 for oil, and the $100 for tolls and parking for a total of $530.
He then figures the standard mileage amount. He multiplies 2,800 miles by 17 cents a mile for a total of $476. He then adds the $100 tolls and parking for a total of $576.
Bill includes the $576 of car expenses with his other medical expenses for the year because the $576 is more than the $530 he figured using actual expenses.
Transportation expenses you can’t include. You can’t include in medical expenses the cost of transportation in the following situations.
• Going to and from work, even if your condition requires an unusual means of transportation.
• Travel for purely personal reasons to another city for an operation or other medical care.
• Travel that is merely for the general improvement of one’s health.
• The costs of operating a specially equipped car for other than medical reasons.
Trips
You can include in medical expenses amounts you pay for transportation to another city if the trip is primarily for, and essential to, receiving medical services. You may be able to include up to $50 for each night for each person. You can include lodging for a person traveling with the person receiving the medical care. For example, if a parent is traveling with a sick child, up to $100 per night can be included as a medical expense for lodging. Meals aren’t included. See lodging, earlier.
You can’t include in medical expenses a trip or vacation taken merely for a change in environment, improvement of morale, or general improvement of health, even if the trip is made on the advice of a doctor. However, see Medical Conferences earlier.
Tuition
Under special circumstances, you can include charges for tuition in medical expenses. See Special Education earlier.
A lump-sum fee which includes education, board, and medical care—without distinguishing which part of the fee results from medical care—is not considered an amount payable for medical care. However, you can include charges for a health plan included in a lump-sum tuition fee if the charges are separately stated or can easily be obtained from the school.
Vasectomy
You can include in medical expenses the amount you pay for a vasectomy.
Vision Correction Surgery
See Eye Surgery.
Weight-Loss Program
You can include in medical expenses amounts you pay to lose weight if it is a treatment for a specific disease diagnosed by a physician (such as obesity, hypertension, or heart disease). This includes fees you pay for membership in a weight reduction group as well as fees for attendance at periodic meetings. You can’t include membership dues in a gym, health club, or spa as medical expenses, but you can include separate fees charged there for weight loss activities.
You can’t include the cost of diet food or beverages in medical expenses because the diet food and beverages substitute for what is normally consumed to satisfy nutritional needs. You can include the cost of special food in medical expenses only if:
- The food doesn’t satisfy normal nutritional needs,
- The food alleviates or treats an illness, and
- The need for the food is substantiated by a physician.
The amount you can include in medical expenses is limited to the amount by which the cost of the special food exceeds the cost of a normal diet.
Wheelchair
You can include in medical expenses the amounts you pay for a wheelchair used for the relief of a sickness or disability. The cost of operating and maintaining the wheelchair is also a medical expense.
Wig
You can include in medical expenses the cost of a wig purchased upon the advice of a physician for the mental health of a patient who has lost all of his or her hair from disease.
X-ray
You can include in medical expenses amounts you pay for X-rays for medical reasons.
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