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Updated for tax year 2023.
As you get older, you may find you face more and more medical bills. No matter how great your insurance coverage is or if you are on Medicare, the out-of-pocket costs due to medical needs can add up. And if you or a loved one have a serious medical condition or disability, your costs can quickly get overwhelming.
If you find yourself overwhelmed with medical costs, you may be able to qualify for certain tax benefits designed to help ease your financial burden. Let’s review some potential tax breaks and practical tips for seniors and their families dealing with the cost of care.
The cost of care
According to the 2023 annual Retiree Health Care Cost Estimate from Fidelity Investments®, the average healthcare costs and medical expenses for a 65-year-old retiring in 2023 was $157,500. Not only that, but A Place for Mom® reported that the national median price for senior living in 2023 was anywhere from $3,000 to almost $6,000 per month, depending on the type of care provided.
These expenses add up quickly and can drain the resources of those who need care most. That’s why individuals and their caregivers need to understand all the potential tax benefits they may qualify for to ensure they take advantage of all possible tax deductions.
Tax credits for seniors
If you care for an elderly parent or another older adult, don’t miss out on these two tax breaks you may qualify for.
Take advantage of the Child and Dependent Care Credit. You can claim this tax credit if you earned income during the year and paid someone to care for your dependent parent. Depending on your income, it is worth anywhere from 20% to 35% of qualified expenses. You can claim a maximum amount of $3,000 for one dependent in 2023 or $6,000 for two dependents if you care for more than one parent.
Claim the Credit for Other Dependents. Though not as valuable as the Child Tax Credit, if you take care of an elderly dependent, you can claim this credit in addition to the Child and Dependent Care Credit. The Credit for Other Dependents is worth $500. This amount starts phasing out if your income exceeds $400,000 for joint filers or $200,000 for all other filers.
Tax deductions for medical expenses
Thankfully, you can also take many tax deductions for medical bills or the medical bills of someone in your care. In fact, in 2019, 4.4 million American tax returns claimed a deduction for medical expenses, according to the Tax Policy Center®. This deduction helps lower your tax liability, giving you more money to designate toward medical care.
But how do you know if you qualify to deduct medical expenses, and how much help will it be in your situation? This guide is designed to give you all the information you need to claim the deductions available to you. Whether for yourself or for someone you love and care for, here is what you need to know about tax deductions for medical care.
Introduction to qualified medical expenses
Anyone, regardless of age or disability, is allowed to take a deduction for what the IRS calls qualified medical expenses. If you have high medical bills, this is the first place to look for a tax break. Here’s what you need to know about deducting medical expenses.
You can claim qualified medical expenses for medical costs above 7.5% of your income. For the 2023 tax season, qualified medical expenses that exceed 7.5% of your adjusted gross income (AGI) are deductible.
Understand how the income percentages work. The deduction for qualified medical expenses is based on your AGI. You can only deduct the expenses exceeding 7.5% of your AGI. For example, if your AGI is $40,000, the first 7.5% of your medical expenses ($3,000 in this case) is not deductible. After your expenses exceed $3,000, you can deduct every qualified expense you spent above $3,000. So, if you had $5,000 in qualified medical bills in this example, you would be able to deduct $2,000 in medical expenses if you itemize your deductions.
Itemize your deductions on your tax return. The only way to deduct qualified medical expenses is to itemize your deductions on your tax return. For this to be beneficial, your total itemized deductions must be greater than the standard deduction.
Determine whether itemizing is better for you than claiming the standard deduction. Sometimes, taking the standard deduction makes more sense than itemizing. For 2023, if your filing status is single, the standard deduction is $13,850; if you file as head of household, the standard deduction is $20,800. If you are a married couple and filing a joint return or a surviving spouse, the standard deduction is $27,700. Sometimes, even with qualified medical expenses, the standard deduction is higher in value than your total itemized deductions. If this is the case, claiming the standard deduction is better because it reduces your taxable income more.
Understand what is considered qualified medical care. Qualified medical care includes medical care of all types, like treatments, preventative care, surgeries and prescription medications. Paying a doctor or medical facility for a procedure likely qualifies as qualified medical care.
Don’t forget vision and dental care. Vision and dental care, including contacts and false teeth, also count as qualified medical expenses.
Deduct psychological and psychiatric care. Psychological and psychiatric care are included in qualified medical expenses as they are behavioral health services.
Treatment costs for alcoholism and drug addiction are also deductible. Rehabilitation center costs are tax deductible, and that includes inpatient services like meals and boarding in rehab facilities. You can even deduct transportation to and from an organization like Alcoholics Anonymous as a medical expense if it’s part of your official treatment plan.
Do not deduct reimbursed medical expenses. If your insurance company, including Medicaid or Medicare or your employer, reimbursed you for the cost of care, it is not deductible.
Do not deduct cosmetic procedures or non-prescription drugs. Apart from insulin, cosmetic procedures and nonprescription drugs are considered optional to your health and are not deductible. If you’re looking for a tax break on those purchases, consider using your health savings account or flexible spending arrangement to pay for them.
Do not deduct expenses you paid for with an FSA or HSA. The money in your FSA or HSA account already has a tax benefit applied, so you cannot deduct costs paid for with those funds.
Use the IRS deduction tool. If you’re unsure about a deduction, the IRS has a handy tool to help you determine if the expense is deductible.
Understand what qualifies for the medical expense deduction.
The medical expenses you can deduct on your taxes go far beyond just the medical bills from your healthcare and procedures. Here’s a closer look at some of the costs you can deduct.
Keep receipts for your prescription medications. Any medication your doctor prescribes can be deductible.
Deduct your health insurance premiums. If you pay for policies that cover medical care, you can deduct the premiums as a medical expense.
Deduct doctor-prescribed nutrition supplements. If your doctor prescribes a nutrition supplement, you can deduct the cost.
Record money spent on incontinence supplies. The cost of incontinence supplies can add up quickly. Fortunately, when prescribed by a doctor, these expenses are deductible.
Deduct the costs of visual aids for the visually impaired. Blind or otherwise visually impaired individuals can deduct the cost of their braille books and magazines. Other visual aids, like devices that magnify computer screens or reading material, are also deductible.
Track the costs of transportation, including mileage and parking fees. For example, you can deduct bus fare if you ride the bus to your medical appointments. You can also deduct ambulance service costs.
Keep tabs on the costs of artificial teeth or limbs. If you need to replace something lost to injury or illness with a medical device or prosthetic, it is considered a tax-deductible qualified medical expense.
Track physical therapy and weight-loss program costs. While you can’t deduct the average gym membership dues, many medical conditions require specific exercise programs to alleviate pain and strengthen muscles. Whether or not that is completed through an official physical therapy office, you can deduct the costs of your exercise program. That includes any medical expenses paid to treat a specific disease diagnosed by your doctor.
Consider the cost of special dietary foods. If your doctor prescribes a specific diet that requires you to purchase costly food to alleviate your medical condition, you can deduct the cost of those foods.
Understand that nursing services and related expenses are covered. If you pay for a live-in nurse, that is a qualified medical expense. Additionally, if you provide the medical attendant with meals, you can deduct the cost of their food. And if you have an increase in the price of rent or utilities due to needing a medical attendant, these extra living expenses are also deductible.
Deduct the cost of furniture required at a doctor’s advice. Sometimes, a patient needs a specific piece of furniture for a medical condition. For example, someone with a cardiac condition may need a reclining chair to sleep safely. If a doctor recommends it, specialized furniture is deductible.
Know how to deduct guide dog or service animal costs. Guide dogs or other official service animals are a great help to many, including visually impaired individuals and patients with hearing or other physical disabilities. The cost of purchasing those animals is high, but it is deductible. You can also deduct the costs of the animal’s care, including food and grooming.
Deduct non-traditional treatments. If you find relief in treatments like chiropractic or acupuncture care, but your insurance doesn’t cover those costs, you can still deduct the cost from your taxes.
Understand you can deduct cosmetic procedures on occasion. If a doctor recommends a cosmetic procedure to improve a deformity or damage from a disease, it may be tax deductible. For example, breast reconstruction surgery after getting a mastectomy as a treatment for breast cancer is deductible.
Deduct the cost of a smoking cessation program. Unlike other items on this list, if you choose to enroll in a smoking cessation program, you don’t need a doctor’s recommendation or prescription. However, you can still deduct that as a qualified medical expense.
You can deduct a wig if your medical condition leads to hair loss. If you are diagnosed with a condition that causes hair loss, you can deduct the cost of a wig or hairpiece if you bought it under the advice of a physician for your mental health.
Deduct the cost of medically necessary home improvements. If you, your spouse or a dependent (such as an elderly relative) need special equipment installed in your home as part of their medical care, it can be a deductible expense. The IRS calls this a capital expense. For example, adding a wheelchair ramp, widening doorways and modifying kitchen cabinets are just a few potentially tax-deductible home improvements.
Keep receipts for all co-payments. Co-pays add up quickly when someone needs extensive medical care, so keep those receipts with your medical expense receipts.
Check the official IRS list to ensure you aren’t overlooking something. IRS Publication 502 has an official list of qualified medical expenses that are deductible. Check that list before filing to ensure you don’t overlook something.
Keep good records to get all your deductions.
To deduct medical expenses, you must have solid records. We know it can be all too easy to lose track of your medical expenses as you go about your routine of receiving medical care. But you could miss out on critical tax deductions if you’re not careful. Here are some tips to help you stay organized.
Pick up an accordion file folder and keep it in an accessible place. This can provide a convenient location for storing receipts. Any medically related receipt should go into this folder. If you can, separate the files according to the medical need or type of supply. That will make it easy to add things up when tax time comes around.
Write down details when needed. Bills from the doctor include details about what they cover, but receipts from stores may not be as clear. When you purchase something for a medical need, make a note at the top of the receipt about why you bought it.
Pay separately for qualified medical expense items. To sort your expenses more efficiently, pay for all qualified medical expenses separately when you check out at the store. This will give you a specific itemized receipt for your records.
Record related mileage on your car. Record your mileage in a small notebook or a mobile app if you use the same vehicle to travel to and from medical appointments. Record the date, starting mileage, ending mileage and reason for the trip. Add the miles up at the end of the year to record your medical-related mileage. Remember, you can record mileage for trips to the store for medical supplies.
Keep your records for at least three years. If your tax return is audited, you will need to show proof of your medical costs. Keep all medical expense receipts with your tax return for at least three years.
Still concerned about organization? These dos and don’ts may help.
DO pick a system that works for you. Make it easy to record your medical expenses. If your system is too complex, you probably won’t use it. If you’re managing the finances for someone else, and others are involved in their care, a complex system makes it more difficult for everyone involved.
DON’T record items that aren’t deductible. Remember, you can’t deduct items you are reimbursed for or that you paid for through another tax benefit, like an HSA account. Only keep receipts for medical expenses that are true qualified medical expenses to decrease confusion.
DO record a little at a time. Collecting and adding up all your receipts at the end of the tax year can be overwhelming. Updating your records a little at a time or as you go is less time-consuming and daunting.
DON’T feel like you need to rent a safe or spend a lot of money storing your medical expense information. Medical expense receipts are not something that identity thieves are likely to target, so a home-based system is a great way to keep your records secure. If you have documents that contain your personal information, like a Social Security number, consider keeping that information locked in a safe at home.
DO keep proof of payment. If you did not receive a doctor’s receipt or bill, consider keeping your bank statement or credit card bill showing proof of the charge and that you paid the medical bill.
Tip: Your pharmacy and your bank can give you statements at the end of the year, summarizing your health-related spending. Those statements may not include everything, but they can at least give you a birds-eye view of your totals. It also might help you catch things you missed.
Managing home health aides and other employees
When someone has a serious disability or needs round-the-clock medical care, you may need to hire a home health aide. Having an employee like this as part of your family can get complex when looking at the financial side. Here are some tips to help you manage your home health aides and to ensure you take advantage of the full tax benefits available when you hire a care provider.
Choosing the right care provider
The right person makes a huge difference in a successful caregiver and patient relationship. Here are some tips to help you find the right one.
Consider hiring someone privately rather than working through an agency. Working through an agency helps you with background checks, but hiring someone directly can save you money. Without an agency, there is no intermediary to pay, and all the money you spend on your loved one’s health care goes directly to the person providing the care.
Write down all the care your loved one needs. Before looking for a caregiver, ensure you understand what care level is needed. For example, if your loved one needs help bathing, they may prefer a same-gender caregiver. If your loved one needs to be lifted, you need a caregiver who is strong enough to do the job.
Talk to others who have used a home health aide. Rather than starting from scratch, consider talking to friends and family who have had a home health aide. If an option, this method can help you find a caregiver who is well-qualified for the job and recommended by a trusted source.
Perform a background check. You can perform a background check on a caregiver candidate with little effort. Background checks uncover any problems on the individual’s record and help reduce the risk of hiring a dangerous individual. You can search many types of records for free online or use the individual’s Social Security number to perform a background check through a company for a fee.
Interview your short list of potential caregivers. Face-to-face interviews with potential caregivers give you a good feel for the individual’s personality and demeanor. If possible, have your loved one participate in the interview to ensure they also feel comfortable with the choice.
Paying your home healthcare worker
When hiring a home healthcare worker, you must complete all the paperwork to ensure taxes are properly paid. Here’s how:
Decide how you will pay your home healthcare worker. To deduct the expense of your home healthcare worker, you have to pay them legally. That means you can’t just give them “under-the-table” cash payments. You must pay them as an independent contractor or as an employee. If you choose the employee route, you must withhold taxes and send them Form W-2 at the end of the tax year.
Create a contract. Draft a formal contract that outlines your expectations of the home health aide, the hours the aide works and the payment details. That will help you not only ensure there are no misunderstandings but also help you get Medicaid coverage to pay for the cost of your home health worker if applicable.
Apply for an employer ID number. If you withhold taxes on behalf of your home health aide, you need to apply for an employer identification number (EIN) from the IRS.
Fill out Form I-9. Form I-9 is the Employment Eligibility Verification, which shows that a home health aide has the required documentation to prove their eligibility to work in the United States. Keep that form with your tax records because the government can request to see it anytime.
Calculate and withhold taxes before paying your caregiver. If you elect to hire your caregiver as an employee, you must withhold federal income tax, state income tax, Social Security tax and Medicare tax from their payments. Record the amount withheld every time you pay the caregiver, or consider using a payroll system to do it for you. Keep in mind that withholding federal income tax from your in-home caregiver is not required by law, but your employee may request that you withhold it. If so, you should collect Form W-4 from your household employee to understand how much tax to withhold from their pay.
Pay your taxes quarterly. Whatever taxes you withhold should be paid to the government every quarter. If you have trouble calculating the taxes, contact a local payroll provider.
Provide Form W-2 at tax time. If you withhold taxes and pay your home health aide as a home employee, you must send them Form W-2 at tax time. That form reports their wages and the amount of taxes withheld. Your caregiver needs it to file their tax return.
Add insurance coverage to your homeowner’s policy. Double-check with your insurance provider to see if your existing home insurance policy covers a home caregiver. If the answer is no, you may want to add additional coverage to give yourself a safety net in case something should happen.
Planning for absences
Remember to plan for illness and vacation. Even after you find the perfect home health aide, you need to plan for vacation and illness. When that home health aide is unavailable, have a standby person you can trust to cover the gap.
Have at least two people who can serve as a standby. If you don’t have an aide in the home caring for your loved one, the care will fall on you, so covering these bases from the beginning is essential. If you are not local or have other responsibilities, you need to ensure the job is covered in an emergency. After all, no caregiver can be available without an occasional break, no matter how responsible they are.
Consider an agency for on-occasion care. Even if you hire a home employee to handle the daily care, you can always opt to use an agency to cover occasional absences if necessary.
Durable versus non-durable equipment
When you purchase medical equipment to care for your loved one, it falls into one of two categories: durable and non-durable. Understanding those categories helps you plan your expenses and taxes. Here’s a closer look at what these two terms mean.
Defining the terms
Determine your durable goods purchases. Durable goods are items that do not easily wear out and are not purchased regularly. That includes specialized furniture, wheelchairs, mobility assistance devices, service animals and similar categories of items. They tend to be expensive purchases.
Outline your non-durable goods. Non-durable goods are consumable items used quickly or in less than three years. In eldercare, non-durable goods include medications, nutritional support, incontinence supplies, medical clothing or footwear and paper products needed for care. They are usually a bit more affordable than durable goods.
Planning for purchases
Determine what large purchases Medicare will cover. Durable medical equipment is often a sizable investment. Medicare generally covers medically necessary items, so check what those are before purchasing anything. Items that are helpful but not medically necessary are not covered. That often includes grab bars, stairway elevators or motorized scooters for those who can walk. Also, many non-durable goods, specifically if they are thrown away after use, are not covered. The exception to that rule is the disposable medical supplies a home healthcare worker uses for medical care.
Consider the necessity of an item. When you care for an elderly loved one, you may find many items that are nice to have but not medically necessary. Prioritize your list of purchases and start with the most necessary ones.
Rent items instead of buying when that is an option. If you need an item for a short period or if the cost is exceptionally high, you could rent it instead of purchasing it. In addition to the benefit of a lower cost, renting means maintenance services are worked into the contract. If the item breaks, repairing it won’t be your responsibility.
Consider payment arrangements. If your loved one does not have a large amount of savings to cover the cost of a piece of medical equipment, consider establishing a payment arrangement. Small monthly payments often fit into the budget better than a big lump-sum purchase.
Contact charitable organizations to look for help. Charitable organizations may have programs to help you pay for durable medical equipment and independent living aids. Find which ones are in your area, and don’t hesitate to ask for help if it’s available.
Properly deducting medical equipment
Understand the tax implications of your durable medical equipment. Durable medical equipment is deductible only when ordered by a doctor and used to alleviate or prevent physical or mental illness. Those items used for general health unrelated to a medical condition are not deductible as durable medical equipment.
Deduct the amounts paid in the current tax year. Deductions are only available for amounts paid in the current tax year. That means you must only include the cost of your rental or monthly payment for the year rather than counting the total cost of the equipment.
Remember that equipment is only deductible if it is deemed medically necessary. The easiest way to prove an item is medically necessary is to have your loved one’s doctor provide a written recommendation related to their medical condition.
Resources to help pay for medical costs
The cost of medical care can be overwhelming for families, especially for seniors or disabled individuals. Social Security, retirement and disability income can be quite limited. And when you don’t have enough to cover the cost of medical care, the bill can fall into your family’s lap. Thankfully, many programs are available to help those who struggle to pay for medical costs get the money they need. Here are some ideas that might help.
Government resources
If your loved one qualifies for Medicare, use that to pay for as much of the medical care as possible. Medicare often covers medical equipment if you have a prescription for it.
Use Medicaid and Medicare for home health care services. According to the Centers for Medicare and Medicaid Services, around 41% of people with Medicare and 24% of those with Medicaid can use those government programs to pay for home health care. To qualify, your loved one’s doctor must certify the need for skilled nursing care or must certify that the patient is homebound. Keep in mind that Medicare only pays for a part-time skilled nurse, not a home health aide or 24-hour care.
Check state and local services. Medicaid and other state-based programs for elderly individuals provide support for home health and medical care. Check with your state’s Department of Aging to determine what health and home care services are available to your loved one on a state basis.
Look for help specific to veterans. If the one needing home health care is a veteran, spouse or surviving spouse of a veteran, they may qualify for benefits to help cover the cost of in-home care like the Housebound allowance. This benefit is paid as an increase to the veteran’s monthly pension.
Locate local programs that assist with medical equipment purchases. Many local non-profits have programs to assist seniors and people with disabilities in paying for their medical equipment.
Non-profit organizations
When government programs aren’t sufficient, you can also look to non-profit organizations for help.
Contact the Family Caregiver Alliance. The Family Caregiver Alliance® operates the National Center on Caregiving, which helps provide information to caregivers to support them in their work. It has information about places to get assistance with medical care.
Reach out to the Rehabilitation Engineering and Assistive Technology Society of North America. Sometimes, this organization offers help to those who need home care devices to help them with their daily living.
Get in touch with your local United Way®. United Way partners with local communities to provide access to health services for those who need it most. They may have a program in your area to help your loved one. They offer programs specific to the aging population that may be worth looking into for financial help.
Other options
There are other creative ways to get the money you need for medical care. Consider these options:
Negotiate with your provider. If you can pay cash, ask for the “cash rate.” Because much less paperwork is involved in those cash transactions, medical offices often pass on some of their savings to the customer. You can also ask for a payment plan or sliding scale billing.
Consider private fundraising. Sometimes, private fundraising to cover the cost of medical care for elderly or disabled loved ones is helpful. This method can be hit or miss and depends on the size of your network. There are many sites you can use to conduct private fundraising events to raise money.
Use a reverse mortgage to pay medical expenses. If your loved one owns their home, you can tap into the equity through a reverse mortgage. This can give you monthly income to pay for your medical expenses. Just remember that a reverse mortgage uses up the home’s equity, which could change what is available in the estate when the homeowner is ready to sell or passes away. Make sure you know all the pros and cons before using this method.
Use the cash value of life insurance. If the individual has a life insurance policy with a cash value, you can borrow against the policy to pay for medical care.
Medicaid planning tips
Medicaid is a state-based but federally-backed program to help low-income individuals pay for medical care. Specifically, Medicaid can cover the cost of long-term care for qualified individuals, which is often quite substantial. However, because Medicaid is a needs-based program, a senior or disabled individual does not qualify if they already have substantial assets to cover the costs.
Those who plan carefully for retirement may have too much saved to qualify for Medicaid. If your loved one doesn’t qualify but could benefit from Medicaid, you could transfer assets into a trust or to family members while the senior is still alive to enable your loved one to qualify. That process is known as Medicaid planning, and there are many lawyers and accountants who specialize in it. Here are some tips to help you with that important step.
Know the current income limits for Medicaid. While the limits vary from state to state, many have an income limit of around $2,829 per month per person. That includes Social Security income. In addition, the individual can’t have assets outside their home valued over a few thousand dollars.
Do not give away assets improperly. If someone gives away a bunch of assets and then applies for Medicaid within five years of the gift, the government will assume the gift was made specifically to qualify for Medicaid. That can trigger an ineligibility period. For that reason, families should always contact a Medicaid lawyer before beginning any Medicaid planning mentioned here.
Consider transferring assets to the individual’s spouse. If the individual’s spouse is living and not in need of Medicaid coverage, the household assets can be transferred into the spouse’s name to make the individual eligible.
Save bank statements. Generally, saving around five years of bank statements to show to Medicaid case workers as needed is good. Statements may be needed to prove there are no hidden assets that are not claimed properly.
Move assets to a disabled child without penalty. If the individual has a child with a disability, the assets may be moved to that child or the trust established for the child’s care without penalty.
Place money in a trust early. If you anticipate the need for Medicaid in the future, consider establishing a trust early. A trust protects money while helping the individual qualify for Medicaid coverage. Check your state’s limits to ensure your trust is not too large to prevent you from qualifying for Medicaid.
Use a Medicaid-compliant annuity. If your loved one is at a point where it’s impossible to avoid a period of ineligibility between gifting or transferring an asset and receiving Medicaid, you can place some of the assets into a Medicaid-compliant annuity. That annuity pays for the individual’s medical care for the duration of the penalty period until Medicaid is available.
The bottom line
The cost of medical care is constantly increasing, and sometimes, it can feel challenging to cover the rising costs. No one wants to miss out on significant tax benefits that can lower your tax responsibility as the caregiver or your loved one as the care recipient. Thankfully, there are many options available to help you manage the cost of care and ensure you claim the right tax deductions. Take advantage of the programs mentioned in this article to ensure you or your loved ones receive proper care as long as necessary.
This article is for informational purposes only and not legal or financial advice.
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