First and foremost, the rules change every year. I’m not a tax expert. My information comes from the IRS website. It’s important to consult a tax professional if you need help with your taxes. Now that the legal stuff is out of the way…
If you have a ton of medical expenses every year you have three main options as far as taxes are concerned.
- Health Savings Account – Pre-tax money for use on medical expenses
- Flexible Spending Account – Also pre-tax money for use on medical expenses, but with different rules.
- Itemize your taxes and reduce your tax burden by claiming medical expenses as a deduction.
Doing one or two does not prevent you from doing number three, but you can’t use the tax-free money and then claim those medical expenses as a deduction on your taxes.
If you sign up for either the HSA (Health Savings Account) or FSA (Flexible Spending Account) then simply using the money is the end of the process. Taking the deduction on your taxes is a bit more time consuming and complex. Anything you plan to deduct on your taxes needs to be accompanied by a receipt proving the expense. You can only take the deduction if your medical expenses exceed 10% of your AGI (Adjusted Gross Income). If one of you is 65 or older the percentage lowers to 7.5% of your AGI.
At this point, you may be asking yourself if all the work of tracking expenses and/or setting up an HSA or FSA is worth the effort. It is, and here’s why. Even if you get money back at the end of the year, you’re still paying taxes. The refund is because you overpaid out of your paycheck. If you take your tax rate, let’s take 25% as an example, and look at your medical costs…
- $5,000 in medical costs would mean you’re paying $5,000 * 0.25 = $1,250 in taxes.
- Taking the money out pre-tax would mean you pay no taxes on it at all.
- Filing it as a deduction on your taxes would mean you would pay the taxes initially, but at the end of the year the government would refund the $1,250. Alternatively, you can reduce the amount you pay in taxes during the year if you know you consistently overpay.
For many families with medically complex children, every dollar counts. It seems like a lot of time and work, but there are two major ways to reduce the workload. First, if you can, set up an HSA or an FSA to avoid the documentation burden at the end of the year. Second, anything you don’t use HSA or FSA funds for, toss the receipts in an old shoe box if you have to. As long as you keep them, you can pay someone to go through them later. The documentation is the key to getting the money back.
If it still seems overwhelming, you’re not alone. A lot of people just don’t deal with it because of how confusing it can be. I would recommend instead you hire a tax professional to take care of it and explain what kind of expenses you need to keep a record of as well as other deductions you can take. For example, mileage to and from doctors appointments is also deductible on your taxes if you keep an accurate log. Even if you pay $100-200 for a tax professional, you’re probably still getting more money back than it costs to hire the help to get it.