Everyone complains about the ever-increasing premium costs of medical insurance. Higher deductibles, higher co-pays, multiple tiers for prescription drugs, no chiropractic or acupuncture coverage, no counseling benefit, limited dental benefits, doctors are out-of-network, waiting periods; the list of complaints goes on.
What is often missed is the hidden cost of medical; TAXES. With successive tax law changes over the years, the ability to deduct medical expenses has been reduced or eliminated. Click the button to see what option are still available.
The list of deductible medical expenses is substantial. To see the kind of medical expenses that can be pre-taxed, the IRS publishes IRS Publication 502 as a guide to Medical and Dental Expenses. While this list is extensive, it is by no means complete. The "rule of thumb" is anything recommended by a doctor would be allowable. Check with your Tax Adviser for guidance.
Paying with after-tax dollars costs you more than you know!
Taxes - The Hidden Premium
Tax deductions matter. The difference between pre-tax and after-tax dollars is that with after=tax dollars you must pay the taxes on income, then pay expenses with what's left. A dollar pre-tax can be as little as sixty-cents after paying federal and state income taxes as well as social security and medicare taxes. So, after tax, a $1 expense can actually cost you $1.67 pre-tax!
The Difficulty of Deducting Benefits
Medical expenses, in general, are not deductible. While high expenses/low income sometimes resulted in a medical itemized deduction, limitations and the requirement of being able to use Schedule A, Itemized Deductions, limit this benefit. The Tax Cut and Jobs Act of 2018 made this deduction almost non-existent by increasing the standard deduction from $12,000 to $24,000 for married couples.
Pre-tax Options
Pre-tax programs are benefit plans usually sponsored by an employer or a self-employed person. Three currently available include:
Flexible Spending Plan (FSA) - An employer-sponsored program that allows certain categories of personal expenses to be deducted from payroll pre-tax. Reduces federal and state income taxes, Social Security and Medicare taxes. Medical expenses limited to $3,200 for 2023.
Health Savings Account (HSA) - individually-owned account with special tax benefits, you must have an HSA-compatible health plan in place to fund the account. Earnings grow tax deferred, withdrawals tax-free for qualified medical expenses. Annual contribution limit for 2019 is $3,500 individual/$7,000 family. Federal income tax deductible, may be state deductible in some states and not deductible for Social Security or Medicare taxes.
Health Reimbursement Account (HRA) - Employer-sponsored and paid, non-taxable to employee. Limits set by employer
