Is there a COVID-19 Medical Expense Deduction?
Congress implemented changes to help Americans facing substantial medical costs related to the coronavirus (COVID-19). The biggest initial change was requiring testing and vaccinations for COVID-19 to be free for everyone and covered by health insurance. This keeps your out-of-pocket expenses at zero for testing and vaccinations regardless of whether you have insurance. Treatment costs for people who contract coronavirus can be expensive. Even for people who have health insurance, the out-of-pocket expenses when you add up deductibles and copays can be quite costly depending on the type of coverage you carry. If you receive bills for COVID-19 treatment that are not reimbursed or covered by your health insurance, you may have other options to assist you with paying the unexpected costs.
If you have unexpected medical bills due to treatment of COVID-19, your best option is to ask your employer to reimburse you for your out-of-pocket expenses. Under a provision of tax law, called Section 139, employers can make qualified disaster relief payments to their employees. Out-of-pocket expenses for COVID-19 treatment qualify because it has been declared a national emergency.
Section 139 allows employers to reimburse employees for reasonable and necessary expenses due to a qualified national disaster. In a situation like the coronavirus pandemic, this includes unreimbursed medical expenses like deductibles, copays, prescriptions, and over-the-counter medications for treatment of COVID-19. If you receive a payment from your employer to pay for out-of-pocket treatment costs, it will be tax free. Also, your employer will be able to deduct the payment to you from their tax return. Unfortunately, employers are not required to reimburse employees for these expenses.
Medical Expense Deduction
Another option that may help you with unreimbursed medical expenses is to deduct them on your tax return when you file. This applies to all unreimbursed qualified medical expenses and not just COVID-19 treatment. IRS Publication 502 reviews in detail qualified medical expenses you may deduct. These expenses include out-of-pocket costs for treatment of COVID-19 discussed above but also includes other unreimbursed medical expenses. Qualified medical expenses include out-of-pocket expenses for preventative care, treatment, surgeries, visits to psychologists and psychiatrists, dental, vision, prescriptions, glasses, contacts, dentures, and hearing aids. Although medical expenses for general health usually are not deductible, the IRS announced in March that personal protective equipment for the “primary purpose of preventing the spread of coronavirus are deductible medical expenses.” This includes masks, hand sanitizer, and sanitizing wipes. This change allows these items to be paid or reimbursed using medical savings accounts including FSAs, MSAs, HRAs, and HSAs.
To qualify for a medical expense deduction of unreimbursed care on your tax return, you first must overcome two tall hurdles. Because these hurdles are so difficult to climb, most people do not qualify for this deduction. In some cases, if you are married, it may make sense to file married-filing-separately to take advantage of the deduction. If you have extensive out-of-pocket medical expenses, you should see an accountant to ensure you are filing your taxes in the most advantageous manner.
Hurdle # 1: Medical expenses must exceed 7.5% of your adjusted gross income. To qualify for the medical expense deduction, the unreimbursed expenses must exceed 7.5% of your adjusted gross income. Only the amount of the unreimbursed medical expenses above the 7.5% are deductible.
Example: Sarah and Jason file their taxes together. Their adjusted gross income is $50,000. Sarah and Jason had a total of $20,000 of unreimbursed medical expenses.
Because Sarah and Jason’s adjusted gross income was $50,000, they would only be able to deduct medical expenses above $3,750 ($50,000 x 7.5%). This means they could claim a medical expense deduction of $16,250. Although they would qualify for the deduction, depending on the next hurdle, it may not save them any on their taxes.
Hurdle # 2: You must itemize your deductions on Schedule A. To qualify to take the medical expenses deduction in addition to only applying to unreimbursed expenses above 7.5% of your adjusted gross income, you must itemize your deductions on Schedule A. In 2020, the standard deduction for couples filing jointly was $24,800. This means before Sarah and Jason even see one dollar in tax savings for the medical expense deduction, in addition to the $16,250 in unreimbursed medical expenses, they would need an additional $8,550 in deductions. The most common additional deductions include mortgage interest, property tax payments, and charitable donations.
If Sarah and Jason do not have enough deductions to itemize to bring them over the standard deduction threshold of $24,800, it is better for them to take the standard deduction. However, this can get complicated. If either Sarah or Jason had most of the medical expenses, it may be better for them to file separately. Filing as married filing separately or single drops the standard deduction to $12,400 each. In some situations, if couples file separately, it qualifies them for larger tax savings. However, many other items must be taken into consideration including how much income they each earned and other deductions and credits they qualify to take.
Nondeductible Medical Expenses: Even if you can climb over these two hurdles, not all medical expenses are tax deductible. You cannot deduct expenses for cosmetic procedures or nonprescription drugs (except insulin). Also, you cannot claim a medical expense deduction for expenses that are reimbursed by your insurance or employer. For example, if your employer reimburses you for your out-of-pocket expenses for COVID-19 treatment, you would then not be able to deduct those same expenses as a medical expense deduction on your tax return. Finally, items purchased for your general health like gym or health club memberships, massages, toothpaste, nonprescription nicotine products, vitamins, or diet foods are not deductible.
The Bottom Line
Overcoming the hurdles to claim unreimbursed medical expenses on your tax return can be difficult. If you have unreimbursed expenses related to the treatment of COVID-19, check with your employer to see if they are willing to reimburse you for your out-of-pocket costs. If they are, you will not have to pay taxes on the funds received. Your employer will receive a tax deduction. Schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group to ensure you are filing your taxes in the most advantageous manner to capitalize on all the deductions and credits you qualify to take.