Wealth management

What qualifies as a medical expense?

What expenses qualify for the IMD? More than most people realize, based on Internal Revenue Service guidelines. Beyond obvious out-of-pocket expenses from doctor visits and prescription drugs, eligible costs include health insurance premiums not paid by employers, transportation to and from medical care (including mileage on your own car), medical equipment, home improvements made to accommodate a disabling condition, long-term care services, and some or all (depending on medical need) of the monthly fees for assisted living, memory care, and continuing care residential facilities.

“I don’t think a lot of people realize how many things can actually be deducted for medical expenses,” Shaw says. “It can even apply to health club memberships, weight loss programs, and smoking cessation programs.”

One deductible expense in particular that flies under the radar, according to Goda, is Medicare premiums. “Many people may not realize that their Medicare premiums count toward this, and those are automatically deducted from Social Security checks,” she explains. The good news? “Medicare premiums can be found on your 1099-SSA form—otherwise known as your Social Security Benefit Statement. As a result, that number is relatively easy to track.”

The claiming challenge

Why aren’t more people claiming these deductions? First, there’s simple lack of awareness. Goda’s research shows that households become more likely to claim the IMD each subsequent time they’re eligible, suggesting they learn about it over time. Second, there’s the hassle of tracking expenses throughout the year and determining eligibility.

The structure of America’s decentralized health care system compounds the problem. “We don’t really have a mandatory reporting system for out-of-pocket payments,” Goda says. “This is very different than, say, when you pay your mortgage and claim the interest deduction. The mortgage provider is required to give you a tax form showing how much interest you’ve paid.”

While requiring all health care providers and insurers to track and report out-of-pocket payments would be costly, some do so voluntarily, and others will provide this information if asked. Nursing homes and long-term care facilities are generally big-ticket items, so determining what portion is deductible could prove valuable. Prescription drug spending and premiums are major sources of out-of-pocket costs for seniors, so compiling these costs could be valuable too.

For those already working with financial advisors, there’s an important message from Goda’s research: Many who could benefit from the medical deduction are already itemizing their tax returns for other reasons. “If you’re already itemizing, it’s a good topic to broach with your advisor,” Goda explains. “Once someone is filing the Schedule A, they’re partway there. So it’s worth taking a bit of extra time to determine whether the medical expenses that are more easily tracked are in the ballpark of 7.5% of AGI.”

We’re here to help

Medical expenses are a significant part of retirement planning, which is why claiming your deductions is so important. Your TIAA Wealth Management advisor can help you identify eligible expenses and coordinate with your tax professional to maximize your savings. Don't yet have an advisor? Schedule an appointment.