2. Medical Expense Deductions
As we age, healthcare costs often become one of our largest expenses. While the hurdle is high, the medical expense deduction can be one of the most valuable overlooked tax write-offs for retirees, especially in a year with significant health events.
You can deduct the amount of your qualifying medical expenses that exceeds 7.5% of your Adjusted Gross Income (AGI). Your AGI is your gross income (from all sources like Social Security, pensions, and investments) minus certain adjustments.
How the 7.5% AGI Threshold Works
Let’s say a retiree has an AGI of $60,000 for the year. The threshold for deducting medical expenses would be 7.5% of $60,000, which is $4,500. This means they can only deduct the portion of their medical expenses that is above $4,500. If their total medical costs for the year were $10,000, they could deduct $5,500 ($10,000 minus the $4,500 threshold).
What Medical Expenses Can You Deduct?
Many retirees don’t realize just how many expenses count toward this total. It’s much more than just doctor’s bills. Commonly missed deductible expenses include:
Insurance Premiums: This is a big one. You can include premiums you pay for Medicare Part B, Medicare Part D (prescription drugs), Medicare Advantage plans, and supplemental (Medigap) policies. The key is that you must be paying for them with your own post-tax money. You cannot deduct premiums that are paid for with pre-tax dollars or subsidized by an employer.
Long-Term Care Insurance: You can include the premiums you pay for a qualified long-term care insurance policy. The deductible amount is limited based on your age.
Dental, Vision, and Hearing: The costs of dental care (including dentures), eye exams, glasses, contact lenses, and hearing aids are all deductible.
Prescription Medications: The cost of any legally prescribed drug is a qualifying expense.
Medical Mileage: Don’t forget the cost of getting to and from medical appointments. You can deduct a standard mileage rate for every mile you drive for medical care. You can also include tolls and parking fees.
Home Modifications: The cost of installing safety features like grab bars, ramps, or walk-in tubs can be deductible if their main purpose is for medical care.
The Importance of Record Keeping
To claim this deduction, you must itemize on Schedule A. It is absolutely essential to keep detailed records. Keep a log of your mileage to medical appointments. Save all receipts from pharmacies, co-pays, and bills from doctors and hospitals. Meticulous records are your best friend if the IRS ever has questions.
