How to save thousands of dollars on medical bills

Photo by Conor Lawless on Flickr

Let’s face it.  Healthcare is expensive.  In this post I’d like to quickly summarize the tax rules that can minimize the cost of your healthcare.  Some of these can save you thousands of dollars a year.

Here is how the IRS defines medical expenses:

Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments 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. 

Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation. 

Medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract.

For a complete list of deductible and non-deductible expenses, click here.

If you are employed, make sure that your employer deducts any healthcare costs from your paycheck “pre-tax.”  This means that you will not be taxed on the income paid out for health insurance.  (If your employer doesn’t do this, then point them here.)

Also find out if your employer has a flexible spending plan.  A flexible spending plan permits you to set aside a fixed amount of “pre-tax” money from each paycheck for certain expenses related to health care (or certain other expenses).  It is placed in a separate account. As you pay medical expenses (anything from the list I referred to above), you can get reimbursed from this account.  If you don’t spend the whole fixed amount during the year, you will lose the unspent amount.  If you spend more than the fixed amount, then you will need to pay the excess out-of-pocket.

If you are not employed, you will probably need to itemize your health insurance cost.  This is no fun because your deduction is limited to the excess of 7.5% over your Adjusted Gross Income.  Because of politics, there are also many newer healthcare tax benefits which can be taken in limited circumstances.  Self-employed individuals may be able to take care of these new adjustments.  The Health Coverage Tax Credit may also apply.

My goal here is to give you an overview of the rules.  They are complicated, but several provisions can save you a lot of money.  Here is a link to more information from the IRS.

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

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