Under current law, medical expenses must exceed 7.50% of your Adjusted Gross Income (AGI) in order to be deducted on your personal income tax return (Form 1040). As a result, it’s unlikely you’ll be able to deduct any medical expenses on your personal return.

While in practice, your best approach is to have your professional corporation pay for all medical expenses. Most of these expenses will be covered by health insurance; however, uninsured expenses provide room for creative tax planning.

During our comprehensive Tax and Business Planning* consulting engagements, provided by the advisors of John K. McGill & Company, we often find clients routinely overlook the following medical deductions that can produce tax-free cash:

1. Paying for all medical insurance premiums for you and your family through your practice. These premiums remain 100% deductible for all doctors (C corporation, S corporation, unincorporated, etc.) even if no staff coverage is provided, since the Obamacare nondiscrimination rules have never come into effect.
2. 65 or older? The IRS has ruled that premiums for Medicare (including Parts A, B, and D), COBRA coverage, and long-term care (see article, “Should You Buy Long-Term Care Insurance?”) are deductible as self-employed health insurance coverage. Your practice can pay them directly or reimburse you if the premiums have already been deducted from your Social Security check.
3. Cost of tuition, meals, lodging, and transportation for schools that furnish special education (private schools) to help children overcome learning disabilities caused by mental or physical impairments (dyslexia, ADHD, etc.). Costs paid for private tutoring by specially trained teachers will also qualify. You need a doctor’s recommendation before qualifying for this deduction and any ordinary education received must only be incidental to the special education.
4. The cost of a health club membership, if membership is prescribed by your doctor to treat a specific physical ailment, such as high blood pressure, arthritis, or to rehabilitate after an injury or surgery.
5. The cost of adding a health spa to your home, where the primary purpose is medical care. The cost is deductible only to the extent that it exceeds the increase in value of your home.
6. The cost of adding a swimming pool to your home (and related upkeep) if the primary purpose is medical care. Again, this is deductible only to the extent that the cost exceeds the increase in the value of your home as a result of the pool’s installation.
7. The cost of domestic or overseas trips (including travel, meals, and lodging) taken to receive medical care or for recovery purposes.
8. The cost of buying, training, and maintaining a service animal (i.e., dog) to assist you, if the service animal is primarily for your medical care to alleviate a mental or physical illness.
9. The costs for in-home care, assisted living, or nursing home services that are medically necessary long-term care services, including the cost of meals and lodging. If you or your spouse need long-term care due to dementia or other cognitive impairment, you’re considered chronically ill if substantial supervision is necessary to protect your health and safety.
10. The cost of counseling, including psychologists, psychiatrists, and licensed social workers and other mental health professionals.

To the extent that these expenses are not covered by medical insurance, the remaining cost can be reimbursed to you by your professional corporation, using one of two options. If you are providing staff health insurance coverage, this can be done through a nondiscriminatory Self-Insured Medical Reimbursement Plan under Section 105.

If you’re not providing employee health coverage, you can do this through a Health Reimbursement Arrangement (HRA). The reimbursements paid are tax-deductible to the corporation and are tax-free to you. Unfortunately, the reimbursement levels generally must be the same for you and your staff under these programs. 

A Better Approach – Tax-Free HSA Reimbursements

Approximately 70% of our members have followed our advice to fund HSAs to gain triple tax benefits. If you’re enrolled in a high-deductible health plan (HDHP), you can make tax-deductible contributions, enjoy tax-deferred growth, and receive tax-free payouts for qualified medical expenses.

We’ve long-recommended paying for medical expenses out-of-pocket, allowing your HSA funds to be invested for tax-deferred growth. Does this mean you won’t be able to withdraw HSA funds tax-free in the future to cover medical expenses previously paid? No! The good news is that if you paid medical expenses out-of-pocket in previous years, you can still make a tax-free HSA withdrawal in an amount equal to the cumulative amount of medical expenses incurred since the date you opened your HSA, provided that you have the receipts to document these expenses.

Many Tax and Business Planning* clients following our advice have accumulated HSA balances of more than $200,000. Using HSA funds to reimburse you for your out-of-pocket medical expenses previously paid, including the creative items discussed above, allows you to generate tax-free cash, without the expense of covering staff under a Medical Expense Reimbursement program described above.  

*For more information on comprehensive tax and business planning services for dentists and specialists, provided through John K. McGill & Company, Inc., call 704.424.9780 or connect online.