With the high costs of medical care today, it is likely that medical expenses comprise a significant part of your itemized deductions. While a large amount of deductions can lead to a large income tax refund, it is important not to accidentally overstate your medical expenses by including medical reimbursements. Only those amounts paid during the taxable year for which you received no insurance or other reimbursement can be included in your expenses for tax purposes. 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 medical and insurance policies provide reimbursements for only certain specific expenses. If you receive reimbursements from such a policy, you must use the total amounts you receive to reduce your total expenses, including those the policy does not provide reimbursement for. The following example has been provided by the IRS to explain this type of 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 that are funded solely by the employee. HRAs reimburse employees for medical care expenses and allow unused amounts to be carried forward. 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 related 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 are reimbursed for medical expenses that you paid in a prior 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.
TAX ADVICE DISCLAIMER:
Please be advised that in order to ensure StrataTax’s compliance with the rules and standards required by the Internal Revenue Service (IRS), we are informing you that any tax advice contained in this communication, including attachments, is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing or recommending this transaction or a tax related matter to another party.
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