Are Band-Aids Deductible?

THE LIMITS OF DEDUCTIBLE MEDICAL COSTS

While you may read about the man who deducts his $100,000 swimming pool as a medical cost, those cases are rare and must jump through lots of hoops and documentation to qualify:

LIMIT 1

Medical costs are part of itemized deduction so with the higher standard deduction ($25,900 in 2023 for MFJ) and limit on state taxes as part of itemized deductions, only 10% of taxpayers take the itemized deduction. If you have a large mortgage and are generous enough with your charitable giving to qualify for itemized deductions, you have jumped through the first hoop to deduct medical costs.

LIMIT 2

Now you must have enough medical expenses to exceed 7.5% of your adjusted gross income (AGI). Your AGI is on Line 11 of the 2022 1040 form, and it includes wages, your practice and investment income, but not the standard or itemized deductions. The example below shows why this is the most difficult limit, especially with the income levels that most dentists enjoy.

This taxpayer has Social Security and Investment income of $60,000 and had medical costs of $7,500. Due to the 7.5% limit, only $3,000 of the medical costs can be included in itemized deductions.

Now let’s consider a typical JNG Advisors client who has an AGI of $450,000 and is relatively healthy. That dentist would need over $33,750 in medical costs before they could start deducting any additional costs.

LIMIT 3

The IRS has specific requirements and a 26 page handout to help you understand what qualifies as a deductible medical expense (spoiler alert: band-aids do not qualify unless applied by the nurse). Here is the latest IRS summary:

Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. They also include the costs of medicines and drugs that are prescribed by a physician. Medical expenses must be primarily to alleviate or prevent a physical or mental disability or illness.

They don't include expenses that are merely beneficial to general health.

So with the Itemized Deduction limits, the 7.5% of AGI limit and no general health costs qualifying, it is very likely that you do not have enough medical costs to be able to deduct any of your medical spending. So what should you do to be tax smart and healthy?

SOLUTION

You can use a Section 125 plan like an HSA or FSA to save taxes on the front end by putting money in those plans pre-tax. Each plan has specific limits on eligibility and contributions, but here is a general example of how if can create tax savings. The best news is that HSA and FSA limits on medical spending are more liberal than deductible medical costs and include band-aids.