Healthcare Costs and Tax Deductions

Healthcare costs are a major expense in retirement, but many retirees don't realize they may be able to deduct some of these costs. Understanding the medical expense deduction can save you significant money on your taxes.

Table of Contents

• The Medical Expense Deduction
• What Qualifies as Medical Expenses
• The 7.5% Threshold
• How to Calculate the Deduction
• What Doesn't Qualify
• Strategies to Maximize the Deduction
• Health Savings Accounts (HSAs)
• Long-Term Care Deductions
• Real Examples

The Medical Expense Deduction

What It Is

Medical Expense Deduction:

• Deduct medical expenses above 7.5% of AGI
• Must itemize to claim
• Why: Helps with high medical costs

Key Point: Only expenses above 7.5% of AGI are deductible.

The Threshold

7.5% of AGI:

• Must exceed this threshold
• Only excess is deductible
• Why: High threshold limits who can claim

Example: $60,000 AGI

• Threshold: $4,500 (7.5% of $60,000)
• Medical expenses: $8,000
• Deductible: $3,500 ($8,000 - $4,500)

What Qualifies as Medical Expenses

Qualified Medical Expenses

1. Doctor and Dental Visits:

• Doctor visits
• Dentist visits
• Specialist visits
• Why: Medical care

2. Prescription Medications:

• Prescription drugs
• Insulin
• Why: Medical treatment

3. Medical Equipment:

• Wheelchairs
• Crutches
• Hearing aids
• Eyeglasses
• Contact lenses
• Why: Medical devices

4. Hospital and Nursing Home Care:

• Hospital stays
• Nursing home care (if primarily medical)
• Why: Medical care

5. Insurance Premiums:

• Health insurance premiums
• Long-term care insurance premiums (limited)
• Medicare premiums (Part B, Part D, Medigap)
• Why: Medical insurance

6. Transportation:

• Mileage to medical appointments (24 cents/mile in 2026)
• Or actual transportation costs
• Why: Medical-related travel

7. Home Improvements:

• If primarily for medical care
• Ramps, railings, etc.
• Why: Medical necessity

8. Other Qualified Expenses:

• Lab fees
• X-rays
• Surgery
• Therapy
• And more
• Why: Medical care

The 7.5% Threshold

How It Works

Threshold Calculation:

• 7.5% of your AGI
• Only expenses above threshold deductible
• Why: High threshold

Example: $80,000 AGI

• Threshold: $6,000 (7.5% of $80,000)
• Medical expenses: $10,000
• Deductible: $4,000 ($10,000 - $6,000)

The Challenge

High Threshold:

• 7.5% is high
• Many retirees don't exceed it
• Why: Limits who can claim

Example: $100,000 AGI

• Threshold: $7,500
• Need $7,500+ in medical expenses: To get any deduction

Why It's Hard to Qualify

Most People Don't Itemize:

• Standard deduction: $30,800 (married)
• Must exceed standard to itemize
• Why: High standard deduction

Example:

• Medical deduction: $4,000
• Other itemized: $20,000
• Total: $24,000
• Standard: $30,800: Take standard instead

How to Calculate the Deduction

Step 1: Calculate AGI

Adjusted Gross Income:

• Your total income
• Minus above-the-line deductions
• Why: Base for threshold

Step 2: Calculate Threshold

7.5% of AGI:

• Multiply AGI by 7.5%
• Why: Threshold amount

Step 3: Add Up Medical Expenses

Qualified Medical Expenses:

• Add all qualified expenses
• Keep receipts
• Why: Must prove expenses

Step 4: Calculate Deduction

Deductible Amount:

• Medical expenses minus threshold
• Only if positive
• Why: Only excess deductible

Step 5: Compare to Standard Deduction

Must Itemize:

• Total itemized deductions
• Compare to standard
• Take whichever higher
• Why: Can't take both

What Doesn't Qualify

Non-Qualified Expenses

1. Over-the-Counter Medications (unless prescribed):

• Aspirin, cold medicine, etc.
• Why: Not prescription

2. Cosmetic Procedures:

• Cosmetic surgery (unless medical)
• Why: Not medical necessity

3. Health Club Memberships:

• Gym memberships
• Why: General health, not medical

4. Nutritional Supplements (unless prescribed):

• Vitamins, supplements
• Why: Not prescription

5. Non-Medical Nursing Home:

• If primarily custodial care
• Why: Not primarily medical

6. Life Insurance:

• Life insurance premiums
• Why: Not medical

Strategies to Maximize the Deduction

Strategy 1: Bunch Medical Expenses

Pay 2 Years in One Year:

• Pay medical expenses in one year
• Itemize that year
• Take standard next year
• Why: Exceed threshold in one year

Example:

• Year 1: Pay $15,000 medical (itemize, get deduction)
• Year 2: Pay $2,000 medical (standard, no deduction)
• Vs. $7,500 each year: May not exceed threshold either year

Strategy 2: Time Elective Procedures

Schedule in Same Year:

• Dental work, surgery, etc.
• In same tax year
• Why: Exceed threshold

Example:

• Year 1: $5,000 medical (below threshold)
• Year 2: $12,000 medical (above threshold, get deduction)
• Better: Schedule $8,000 in Year 1 to exceed threshold

Strategy 3: Track All Expenses

Keep Detailed Records:

• All medical expenses
• Receipts, statements
• Why: Maximize deduction

Common Missed Expenses:

• Mileage to appointments
• Over-the-counter (if prescribed)
• Insurance premiums
• Why: Easy to miss

Strategy 4: Use HSA

Health Savings Account:

• Pay medical expenses from HSA
• Tax-free withdrawals
• Why: Better than deduction (no threshold)

Example: $5,000 medical expenses

• HSA: $0 tax (tax-free)
• Vs. deduction: May not exceed threshold

Health Savings Accounts (HSAs)

How HSAs Work

Triple Tax Advantage:

• Contributions: Pre-tax (or deductible)
• Growth: Tax-free
• Withdrawals: Tax-free for medical expenses
• Why: Best healthcare savings tool

HSA vs. Medical Deduction

HSA Is Better:

• No 7.5% threshold
• Tax-free (not just deduction)
• Why: More valuable

Example: $5,000 medical expenses

• HSA: $0 tax (tax-free)
• Deduction: May not exceed threshold, or only partial deduction

HSA Eligibility

Must Have HDHP:

• High-deductible health plan
• Why: Requirement for HSA

2026 Limits:

• Single: $4,150
• Family: $8,300
• Why: Contribution limits

Long-Term Care Deductions

Long-Term Care Insurance

Premiums May Be Deductible:

• As medical expense
• Subject to age-based limits
• Why: Helps with long-term care costs

2026 Limits (age-based):

• Under 40: $480
• 40-50: $890
• 50-60: $1,780
• 60-70: $4,750
• Over 70: $5,960
• Why: Age-based limits

Long-Term Care Services

Qualified Long-Term Care:

• May be deductible as medical expense
• If primarily medical care
• Why: Medical care

Example: Nursing home care

• If primarily medical: Deductible
• If primarily custodial: Not deductible
• Why: Medical vs. custodial distinction

Real Examples

Example 1: High Medical Expenses

Situation: Married, $80,000 AGI, $15,000 medical expenses

Threshold: $6,000 (7.5% of $80,000)

Deductible: $9,000 ($15,000 - $6,000)

Tax Savings: $9,000 × 22% = $1,980

Other Itemized: $20,000

Total Itemized: $29,000

Standard: $30,800

Take Standard: Actually better (but close)

Example 2: Moderate Medical Expenses

Situation: Single, $60,000 AGI, $8,000 medical expenses

Threshold: $4,500 (7.5% of $60,000)

Deductible: $3,500 ($8,000 - $4,500)

Tax Savings: $3,500 × 22% = $770

Other Itemized: $12,000

Total Itemized: $15,500

Standard: $15,400

Itemize: Slightly better ($100 more)

Example 3: Using HSA

Situation: $10,000 medical expenses, $10,000 in HSA

HSA Withdrawal: $10,000 tax-free

Tax Savings: $2,200 (at 22% bracket)

Vs. Deduction: May not exceed threshold, or only partial

HSA Better: No threshold, tax-free

Bottom Line

Healthcare costs and tax deductions:

1. Medical expense deduction: Above 7.5% of AGI, must itemize
2. High threshold: Many retirees don't exceed it
3. Many expenses qualify: Doctor visits, prescriptions, insurance, etc.
4. HSAs are better: No threshold, tax-free withdrawals
5. Bunching strategy: Pay expenses in one year to exceed threshold

Key Takeaways:

• Medical expense deduction: Above 7.5% of AGI, must itemize
• High threshold: Many retirees don't exceed it
• Many expenses qualify: Doctor visits, prescriptions, insurance, equipment, etc.
• HSAs are better: No threshold, tax-free withdrawals for medical expenses
• Bunching strategy: Pay 2 years of expenses in one year to exceed threshold
• Track all expenses: Mileage, premiums, etc. - easy to miss
• Compare to standard deduction: Must itemize to claim

Action Steps:

1. Understand medical expense deduction (7.5% of AGI threshold)
2. Track all medical expenses throughout year
3. Keep receipts and records
4. Calculate if you exceed threshold
5. Consider bunching strategy (pay 2 years in one year)
6. Use HSA if eligible (better than deduction)
7. Compare itemized to standard deduction
8. Work with professional if needed

Remember: Healthcare costs are a major retirement expense, and the medical expense deduction can help, but the 7.5% threshold is high. Track all your medical expenses, consider bunching strategies, and use HSAs if eligible (they're better than the deduction). The key is understanding what qualifies and planning to maximize your tax benefits.