Your medical expenses may make up a large part of your itemized deductions. While a large amount of deductions can lead to a large income tax refund, it is important not to overstate your medical expenses by including medical reimbursements. Keep in mind, you can include in medical expenses only those amounts paid during the taxable year for which you received no insurance or other reimbursement. If you receive reimbursements from medical expenses from insurance or other sources, such as Medicare, during the year, you must reduce your total medical expenses for the year by the amount of the reimbursements. You do not have a medical deduction if you are reimbursed for all of your medical expenses for the year.
Policies Pertaining to Specific Expenses. Some insurance or medical policies provide reimbursements for only certain specific medical expenses. If you receive reimbursements from such a policy, you must use the total amounts you receive to reduce your total medical expenses, including those the policy does not provide reimbursement for. The IRS has provided an example of this situation:
Example. You have insurance policies that cover your hospital and doctors’ bills but not your nursing bills. The insurance you receive for the hospital and doctors’ bills is more than their charges. In figuring your medical deduction, you must reduce the total amount you spent for medical care by the total amount of insurance you received, even if the policies do not cover some of your medical expenses.
Health Reimbursement Arrangement (HRA). Health reimbursement plans are employer-funded plans. They reimburse employees for medical care expenses and allow unused amounts to be carried forward. An HRA is funded solely by the employee. Reimbursements for medical expenses, up to a maximum dollar amount for a coverage period, are not included in the employee’s income.
Excess Reimbursements. You may have to include in income any amount you are reimbursed that is more than your medical expenses.
Premiums Paid by You. Generally, you do not include the excess reimbursements in your gross income that are from a medical insurance or similar plan in which you paid the entire premium.
Premiums Paid by You and Your Employer. Portions of excess reimbursements should be included in your gross income if both you and your employer contribute to the medical insurance plan from which you received excess reimbursements. This is only the case if your employer’s contributions are not included in your gross income.
Reimbursements in a Later Year. If you pay medical expenses in one year and are reimbursed in a later year, you generally must report the reimbursement as income up to the amount you previously deducted as medical expenses. Only report as income the amount you received that reduced your taxes in the earlier year. If you did not deduct a medical expenses in a year you paid it, and later received a reimbursement for it, do not include the reimbursement up to the amount of the expense in income.
Your tax preparer can provide you with more information regarding the treatment of medical expenses on your income tax return. StrataTax, a San Diego consulting and tax services firm, is available year-round to assist you with income tax preparation and tax planning. Call us at (858) 225-7720 to setup your free initial consultation or visit us at www.StrataTax.com for more information.
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