While researching for a medical tax deductions post several years ago, I ran across the rules involved with claiming medical tax deductions. I remember thinking to myself, “who would actually have to spend more than 10% of their income on health expenses to be able to take advantage of this deduction?”
I mean, 10% of someone's income is a lot of money, and if you're insured, then it seems unlikely that threshold would be met.
And then, it happened to us.
How We Reached the Medical Bill Deduction
We topped the medical tax deductions threshold for two reasons:
- Our income had been slashed in half with a job Paul found after being laid off five months earlier.
- The birth of our son was followed by a three-day stint in NICU and then a six-day stint where I had to go to the emergency room and be readmitted after leaving the first time.
Our Health Insurance Maximum Out of Pocket Protected Us
Even though our medical bills ballooned that year, they could have been far worse. To give you an idea, our son's three-day stay in the NICU was billed at over $39,000 to our insurance company. The birth alone was around $10,000. My stay in the hospital after being readmitted from complications was around $50,000.
Granted, you can negotiate with a medical provider, especially if you don't have health insurance. But still, our costs would have been much more substantial and panic-inducing without our insurance plan.
How the Tax Deduction Works
This deduction is not meant to cover the occasional or typical medical costs you come up against each year, such as co pays to visit your doctor, or prescriptions. Rather this is a tax deduction to help those when their medical expenses have equaled a significant portion of their budget for the year.
Like ours did.
In fact, you can only deduct the amount of qualified medical expenses you paid that go above 10% of your adjusted gross income (or 7.5% if you or your spouse is 65 or older). So if you paid out $12,000 in qualified medical expenses, and 10% of your adjusted gross income is $10,000, then you can only deduct $2,000.
Here's a whole lotta more info on this, including what exactly is considered a qualified medical expense.
And if you want even more help in figuring out specifics for your situation, here's an interactive questionnaire from the IRS to see if you can claim this or not.
Nice Reminder to Buffer Your Savings to Cover Deductibles
You might think it's a pipe dream, but from experience I can say it makes this sticky situation much easier when you have enough money in savings to cover your deductibles. And not just health deductibles, but also your auto insurance deductible.
Honestly, I would shoot for having the amount of deductibles you need to meet on top of a normal emergency savings of 6 months' expenses.
On our plan, the annual, maximum, out-of-pocket that we can pay is capped at $4,500/per person, $9,000/family.
And we paid every penny of that $9,000.
Those were some of the hardest days of my life − a mother seeing her son go through the NICU, then being separated from him while living through a horrific, 6-day re-hospitalization myself.
I hope that this never happens to you, both from an emotional and a financial perspective.