Don’t Make This Common Mistake When Calculating Medical Expenses

With today’s high health care costs, medical expenses are likely to comprise a significant portion of your itemized deductions. While a large number of deductions can lead to a large income tax refund, it’s important not to accidentally overstate your medical expenses by including medical reimbursements. Only those amounts paid during the tax year for which you did not receive insurance or other reimbursement can be included in your expenses for tax purposes. If you receive reimbursements for medical expenses from insurance or other sources, such as Medicare, during the year, you must reduce your total medical expenses for the year by the amount of the reimbursements. You don’t have a medical deduction if you receive funds for all of your medical expenses for the year.

Policies Relating to Specific Expenses. Some medical and insurance policies provide reimbursement only for certain specific expenses. If you receive reimbursements from such a policy, you must use the full amounts you receive to reduce your total expenses, including those for which the policy does not provide reimbursement. The following example has been provided by the IRS to explain this type of situation:

Example. He has insurance policies that cover hospital and doctor bills, but not nursing bills. The insurance you receive for hospital and doctor bills is more than your charges. When calculating your medical deduction, you must reduce the total amount you spent on medical care by the total amount of insurance you received, even if the policies don’t cover some of your medical expenses.

Health Reimbursement Agreement (HRA). Health reimbursement plans are employer-funded plans that are funded solely by the employee. HRAs reimburse employees for health care expenses and allow unused amounts to roll over. Reimbursements for medical expenses, up to a maximum dollar amount per period of coverage, are not included in the employee’s income.

Excess refunds. You may need to include in income any amount you receive funds in excess of related expenses.

Premiums paid by you. Generally, you don’t include excess reimbursements in your gross income from health insurance or a similar plan where you paid the full premium.

Premiums paid by you and your employer. Portions of excess reimbursements must be included in your gross income if both you and your employer contribute to the health insurance plan from which you received the excess reimbursement. This is only the case if your employer contributions are not included in your gross income.

Refunds in a subsequent year. If you receive funds for medical expenses you paid in a prior year, you generally must report the reimbursement as income up to the amount you previously deducted for medical expenses. Only report as income the amount you received that reduced your taxes in the previous year. If you didn’t deduct a medical expense in a year you paid for it, and then got reimbursed for it, don’t include the reimbursement up to the amount of the expense in your income.

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