Health-Care Savings Series—Day 5: Use available tax deductions and credits to lower your health care spending

Over the course of a year medical expenses can really add up, especially if there is an adverse health event in your family. In these cases, make sure you know the relevant tax laws to claim the appropriate end-of-year tax deductions. There’s also a tax credit to help unemployed workers pay for health coverage. And if you need to hire someone to take care of a sick child or spouse, there is a tax credit for those expenses as well.

• Medical and Dental Expenses. You may be able to claim a deduction on unreimbursed medical expenses for you, your spouse, or a dependent once your total spending exceeds 7.5 percent of your gross adjusted income. (That's about $3,750 in health-related spending for a person with adjusted gross income of $50,000 a year.)

This deduction may be more helpful for those with high out-of pocket medical costs on fixed or low incomes. It may also apply to families with major adverse health events in a year, and the self-employed with significant health care spending. But the deductions can apply to a wide-variety of expenses related to conditions and procedures, including individual health insurance premiums (you can't deduct most employer-sponsored premiums) and medications, as well as ancillary expenses related to a medical condition, such as legal fees, medical lodging, travel, and weight loss programs. If your family has a lot of medical expenses, it might pay to add them up and see if you qualify. For more on deducting medical and dental expenses, see IRS Publication 502*.

• Health Coverage Tax Credit. This tax credit is available for certain manufacturing workers who have lost their jobs due to international competition, so its availability is limited. In order to qualify, individuals must be certified as recipients of Trade Adjustment Assistance or Alternative Trade Adjustment Assistance services and benefits, or collect a pension from the Pension Benefit Guaranty Corporation, and pay for their own qualified health insurance. In order to access these benefits, a group of workers must first petition the U.S. Department of Labor's Division of Trade Adjustment Assistance, see this website for more.

Once qualified, these workers can get a refundable credit to help pay for 65 percent of the cost of qualifying health coverage. The "refundable" part means that even people who don't owe income tax can get the money. To claim this benefit, or find out more, see IRS Form 8885*.

• Child and Dependent Care Expenses. You may be able to claim a tax credit for up to 35 percent of expenses used to pay someone to care for a child under 13, or a spouse or dependent unable to care for themselves. This credit is not limited to medical purposes, though it can be used in the case of a temporary or permanent medical condition or disability. You can also apply any medical expenses toward this tax credit, whether or not you qualify for the medical and dental deductions above, but you can't claim expenses for both the credit and the deductions. For more on how to qualify and claim the credit, see IRS Publication 503*.

*IRS publications for 2008 are not yet available. Use the 2007 forms and publications above as a reference, but note that there may be changes in this year’s taxes.

—Kevin McCarthy, associate editor

See our blog next week for more on tax savings from Flexible Spending Accounts and Health Savings Accounts, and four other ways to save.

Comments

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