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Chapter 22. Medical and Dental Expenses

Cosmetic surgery. Beginning in 1991, the cost of surgery for purely cosmetic
reasons, which does not serve a medical purpose, generally is not deductible
as a medical expense. This applies to any procedure that is directed at
improving the patient's appearance and does not meaningfully promote the
proper function of the body or prevent or treat illness or disease. Procedures
such as face lifts, hair transplants, hair removal (electrolysis) and
liposuction generally are not deductible.

You can include in medical expenses the amount you pay for cosmetic surgery if
it is necessary to improve a deformity arising from, or directly related to,
a congenital abnormality, a personal injury resulting from an accident or
trauma, or a disfiguring disease.

Self-employed medical insurance. The special rule that allows self-employed
individuals to deduct 25% of medical insurance premiums from gross income was
extended to June 30, 1992. See Health Insurance Costs for Self-Employed
Persons.

Introduction

This chapter discusses how to claim a deduction for your medical and dental
expenses. It contains a checklist of items that you can or cannot include
in figuring your deduction. It also explains how to treat insurance
reimbursements and other reimbursements you may receive for medical expenses.

It will help you determine:

∙  Whose expenses you can include,

∙  What expenses you can include,

∙  How to claim expenses of a decedent, and

∙  How to figure your deduction.

To deduct any medical and dental expenses, you must itemize your deductions on
Schedule A (Form 1040). You must reduce the amount of your medical expenses by
any reimbursement you receive for these expenses.

There are limits on the amount you can deduct. You can deduct only the amount
of your medical and dental expenses that is more than 7.5% of your adjusted
gross income shown on line 32, Form 1040. See How to Figure Your Deduction.

Related publication and form.

This chapter refers to the following:

    Publication 502, Medical and Dental Expenses

    Schedule A (Form 1040), Itemized Deductions

Whose Expenses Can You Include?

You can include medical expenses you pay for yourself and for the individuals
discussed in this section.

Spouse. You can include medical expenses you paid for your spouse. You must
have been married at the time the expenses were incurred or when you paid
the bills.

Example 1. Mary received medical treatment before she married Bill. Bill
paid for the treatment after they married. Bill can include these expenses in
figuring his medical expense deduction, even if Bill and Mary file separate
returns.

If Mary had paid the expenses before she and Bill married, Bill could not
include Mary's medical expenses on his separate return. Mary would include all
the medical expenses she paid during the year on her separate return. If they
filed a joint return, the medical expenses both paid during the year would be
used to figure their medical expense deduction.

Example 2. During 1992, John paid medical expenses for his wife Louise, who
died in 1991. He married Belle in 1992, and they file a joint return. Because
John was married to Louise when she incurred the medical expenses, he can
include those expenses in figuring his medical deduction for 1992.

Dependents. You can include medical expenses you paid for a person who was
your dependent at the time the medical services were provided or at the time
you paid the expenses. You can also include medical expenses for a person you
could have claimed as a dependent except that the person had gross income
of $2,300 or more or had filed a joint return. See Chapter 3 for who can be
claimed as a dependent.

Example 1. In 1991, you claimed your son as a dependent. In 1992, he no
longer qualifies as your dependent. However, you paid $800 in 1992 for medical
expenses your son incurred in 1991 when he was your dependent. You can include
the $800 in figuring your 1992 medical expense deduction. You cannot include
this amount on your 1991 return.

Example 2. You provided more than half of your married daughter's support,
including her medical expenses of $1,200. She and her husband file a joint
return. Although you may not be able to claim your daughter as a dependent,
you can include in your medical expenses the $1,200 you paid.

Adopted child. You can include medical expenses that you paid before adoption,
if the child qualified as your dependent when the medical expenses were
provided or when you paid the expenses. If you pay back an adoption agency or
other persons for medical expenses they paid under an agreement with you,
you are treated as having paid those expenses. But if you pay back medical
expenses incurred and paid before adoption negotiations began, you cannot
include them as medical expenses.

Child of divorced or separated parents. If either parent can claim a child as
a dependent under the rules for divorced or separated parents, each parent can
include the medical expenses he or she pays for the child. See Support Test
for Divorced or Separated Parents in Chapter 3.

Support claimed under a multiple support agreement. A multiple support
agreement is used when two or more people provide more than half of a person's
support, but no one alone provides more than half. If you are considered to
have provided more than half under this agreement, you can include medical
expenses you pay, even if you cannot claim the person as a dependent because
he or she had gross income of $2,300 or more or filed a joint return.

Any medical expenses paid by others who joined you in the agreement cannot be
included as medical expenses by anyone. However, if you and the others shared
only the nonmedical support items and you separately paid the medical
expenses, you can include the entire amount you paid for medical expenses.

Example. You and your three brothers each provide one-fourth of your mother's
total support. Under a multiple support agreement, you claim your mother as a
dependent. You paid all of her medical expenses. Your brothers repaid you for
three-fourths of these expenses. In figuring your medical expense deduction,
you can include only one-fourth of your mother's medical expenses. Your
brothers cannot include any part of the expenses.

However, if you and your brothers share the nonmedical support items and you
separately pay all of your mother's medical expenses, you can include the
amount you paid for her medical expenses in your medical expenses.

Medical Expenses

Use the checklist in this chapter as a guide to determine which medical and
dental expenses you can include on Schedule A. See Publication 502, Medical
and Dental Expenses, for information about other expenses you can include.

                    Medical and Dental Expenses Checklist

   You can include

   Prescription medicines(those requiring a prescription by a doctor for
   their use by an individual) and insulin

   Medical services fees (from doctors, dentists, surgeons, specialists, and
   other medical practitioners

   Special items (artifical limbs, false teeth, eye-glasses, contact lenses,
   hearing aids, crutches, wheelchair, etc.)

   Hospital services fees (lab work, therapy, nursing services, surgery,
   etc.)

   Meals and lodging provided by a hospital during medical treatment

   Psychiatric care at a specially equipped medical center (includes meals
   and lodging)

   Treatment at a drug or alcohol center (includes meals and lodging
   provided by the center)

   Special school or home for mentally or physically handicapped persons
   (see Publication 502)

   Birth control pills prescribed by your doctor

   Legal abortion

   Legal operation to prevent having children

   Expenses of an organ donor

   Oxygen equipment and oxygen

   Cost and care of guide dogs or other animals aiding the blind, deaf, and
   disabled

   Part of life-care fee paid to retirement home designated for medical care

   Medical and hospital insurance premiums (see discussion)

   Transportation for needed medical care (see discussion)

   Capital expenses for equipment or improvements to your home needed for
   medical care (see Publication 502)

   Cost of lead-based paint removal (see Publication 502)

   Wages for nursing services (see Publication 502)

   Social Security tax for worker providing medical care (see Publication 926)



   You cannot include

   Medicine you buy without a prescription

   Toothpaste, toiletries, cosmetics, etc.

   Illegal operation or treatment

   Maternity clothes

   Diaper service

   Nursing care for a healthy baby

   Medical insurance included in a car insurance policy covering all persons
   injured in or by your car

   Life insurance or income protection policies, or policies providing
   payment for loss of life, limb, sight, etc.

   Surgery for purely cosmetic reasons

   Expenses for your general health (even if following your doctor's advice)
   such as

   Trip for general health improvement

   Weight loss program

   Program to stop smoking

   Household help (even if you are physically unable to do housework)

   Health club dues

   Social activities, such as dancing or swimming lessons

   Funeral, burial or cremation expenses

Medical Insurance Premiums

You can include in medical expenses premiums you pay for policies that provide
payment for:

   Hospitalization, surgical fees, and other medical and dental expenses,

   Prescription drugs,

   Replacement of lost or damaged contact lenses, or

   Membership in an association that gives cooperative or so-called
   "free-choice" medical service, or group hospitalization and clinical
   care.

If you have a policy that provides more than one kind of payment, you can
include the premiums for the medical care part of the policy if the charge
for the medical part is reasonable. The cost of the medical portion must be
separately stated in the insurance contract or given to you in a separate
statement.

Medicare A. If you are covered under social security (or if you are a
government employee who paid Medicare tax), you are enrolled in Medicare
A. The tax paid for Medicare A is not a medical expense.

If you are not covered under social security (or were not a government
employee who paid Medicare tax), you may voluntarily enroll in Medicare A. In
this situation the premiums paid in 1992 for Medicare A can be included as a
medical expense on your tax return.

Medicare B. Medicare B is supplemental medical insurance. Premiums you pay for
Medicare B are a medical expense. If you applied for it at age 65, you can
deduct $29.90 for each month in 1992 for which you paid a premium. If you were
over age 65 when you first enrolled, check the information you received from
the Social Security Administration to find out your premium.

Prepaid insurance. Premiums you pay before you are 65 for insurance covering
medical care for yourself, your spouse, and your dependents after you reach
65 are medical care expenses. These premiums are included in your medical
expenses in the year paid if they are:

    Payable in equal yearly installments, or more often, and

    Paid for at least 10 years, or until you reach 65 (but not for less than
    5 years).

Premiums paid for a retired employee. You may continue to participate in
certain employer health plans after you retire. Under these plans, you may
either receive a cash payment for unused sick leave or have the payment
applied to the cost of insurance. The value of the unused sick leave must be
included in your gross income. Include in medical expenses the payment applied
to the cost of insurance as a medical insurance premium.

If the plan provides that your employer automatically apply unused sick leave
pay to your health insurance premiums, do not include the value of the unused
sick leave in your gross income. You cannot include the premiums paid in
medical expenses.

Health insurance credit. If you qualify to receive the earned income credit,
you may be able to claim a credit based on health insurance premiums you pay.
This credit is discussed in Chapter 35.

If you claim the health insurance credit, you must subtract the amount of
that credit from your total medical expenses to figure your medical expense
deduction.

Health Insurance Costs for Self-Employed Persons

If you were self-employed or a 2% shareholder (who is treated as a partner)
in an S corporation, you can deduct as a business expense up to 25% of
the medical insurance premiums you paid through June 30, 1992 for yourself
and your family. You must not be eligible to participate in any subsidized
health plan of your employer or your spouse's employer.

Do this on line 26 of Form 1040. If you itemize your deductions, include the
remaining premiums with all other medical care expenses on Schedule A subject
to the 7.5% limit.

Use the following worksheet to figure your deduction unless:

∙  You file Form 2555, Foreign Earned Income, or you have more than one
   source of income subject to self-employment tax. Instead, use the
   worksheet in Publication 535, Business Expenses.

∙  You claim the health insurance credit on Schedule EIC (Form 1040),
   Earned Income Credit. Instead, use the worksheet in Publication 596,
   Earned Income Credit.

Worksheet for Self-Employed Health Insurance Deduction

    1. Enter the amount paid through June 30,
       1992 for health insurance for you, your
       spouse, and dependents .....................  __________
    2. Percentage used to figure the
       deduction ..................................     x .25
                                                     __________
    3. Multiply line 1 by the percentage on
       line 2 .....................................  __________
    4. Enter your net profit and any other
       earned income* from the business under
       which the insurance plan is established,
       minus any deductions you claim on Form
       1040, lines 25 and 27 ......................  __________
    5. Enter the smaller of line 3 or
       line 4 here and on Form 1040, line 26.
       (DO NOT include this amount in figuring
       any medical expense deduction on
       Schedule A (Form 1040).) ...................  __________

* Earned income includes net earnings and gains from the sale, transfer, or
licensing of property you created. It does not include capital gain income.
If you were a more than 2% shareholder in an S corporation, earned income is
your wages from that corporation.

Meals and Lodging

Payment for meals and lodging provided by a hospital or similar institution as
a necessary part of medical care is a medical expense if the main reason for
being in the hospital is to receive medical care.

You can also include in medical expenses the cost of lodging (but not meals)
while away from home, even though not provided in a hospital or similar
institution, if you meet all of the following requirements.

∙  The lodging is primarily for and essential to medical care.

∙  Medical care is provided by a doctor in a licensed hospital or in a
   medical care facility related to, or the equivalent of, a licensed
   hospital.

∙  The lodging is not lavish or extravagant under the circumstances.

∙  There is no significant element of personal pleasure, recreation, or
   vacation in the travel away from home.

The amount you include in medical expenses cannot exceed $50 for each night
for each person. Lodging is included for a person for whom transportation
expenses are a medical expense because that person is traveling with the
person receiving the medical care. For example, if a parent is traveling
with a sick child, up to $100 per night for lodging is included as a medical
expense.

Nursing home. You can include in medical expenses the cost of medical care
in a nursing home or home for the aged for yourself, your spouse, or your
dependents. This includes the cost of meals and lodging in the home if the
main reason for being there is to get medical care.

Do not include the cost of meals and lodging if the reason for being in the
home is personal. You can, however, include in medical expenses the part of
the cost that is for medical or nursing care.

Medical trip. You cannot include the cost of your meals and lodging while you
are away from home for medical treatment that you do not receive at a medical
facility, or for the relief of a specific condition, even if the trip is made
on the advice of your doctor.

Example. You have a heart condition. You live in an area that has cold
winters, which makes your condition worse. Your doctor advises you to spend
the winter in a warmer place. You and your family spend the winter in a rented
house in Florida. The trip is made for a specific medical reason. You cannot
include any of the expenses for food and lodging between your home and Florida
or while you are in Florida as a medical expense. However, your share of the
transportation expenses between your home and Florida is included as a
medical expense. Your family's transportation is not deductible.

Transportation

Amounts paid for transportation primarily for, and essential to, medical care
qualify as medical expenses.

Include -

    Bus, taxi, train, and plane fares,

    Ambulance service,

    Car expenses,

    Transportation expenses of a parent who must go with a child who needs
    medical care, and

    Transportation expenses of a nurse or other person who can give
    injections, medications, or other treatment required by a patient who
    is traveling to get medical care and is unable to travel alone.

Do not include -

    Transportation expenses to and from work even if your condition requires
    an unusual means of transportation, or

    Transportation costs if, for nonmedical reasons only, you choose to
    travel to another city, such as a resort area, for an operation or other
    medical care prescribed by your doctor.

Car expenses. You can include out-of-pocket expenses for your car, such as
gas and oil. You cannot include depreciation, insurance, general repair, or
maintenance expenses.

If you do not want to figure your actual expenses, you can use a standard rate
of 9 cents a mile for each mile you use your car for medical reasons.

Either way, you can include the cost of parking fees and tolls.

Disabled Dependent Care Expenses

Some disabled dependent care expenses may qualify as medical expenses or as
work-related expenses for purposes of taking a credit for dependent care (see
Chapter 33). You can choose to apply them either way as long as you do not use
the same expenses to claim both a credit and a medical expense deduction.

Impairment-Related Work Expenses

Certain unreimbursed expenses may appear to be deductible as either medical or
business expenses. Deduct them as business deductions if they are:

    Necessary for you to do your work satisfactorily,

    For goods or services not required or used, other than incidentally, in
    your personal activities, and

    Not specifically covered under other income tax laws.

Example. You are blind. To do your work, you must use a reader. You use
the reader both during your regular working hours at your place of work and
outside your regular working hours away from your place of work. The reader's
services are only for your work. You can deduct your expenses for the reader
as business expenses.

See Publication 907, Tax Information for Persons with Handicaps or
Disabilities, for more information on expenses that may be impairment-related
work expenses.

Decedents

Expenses paid by a decedent's estate for the decedent's medical care can
be treated as paid by the decedent at the time the medical services were
provided, if they are paid within the one-year period beginning with the day
after the date of death. This treatment applies only if the expenses are not
deducted in figuring the taxable estate for federal estate tax purposes.
If the expenses are claimed on the decedent's Form 1040 (or the decedent's
amended return, Form 1040X), a statement must be filed with the return showing
that they have not been, and will not be, claimed on the estate tax return.

Amended returns and claims for refund are discussed in Chapter 1.

Example. John filed his 1991 income tax return on April 10, 1992. He died on
June 1, 1992. His unpaid medical expenses were $1,500 for 1991 and $2,000 for
1992. His executor paid the $3,500 in medical expenses in January 1993.

The executor can file an amended return for 1991, claiming the $1,500 medical
expenses as paid in 1991. The $2,000 for 1992 can be treated as paid in 1992
and included as a medical expense on the return for 1992, which will be the
decedent's final return.

Expenses for deceased spouse or dependent. If you paid medical expenses for
your deceased spouse or dependent, include them as medical expenses in the
year paid, whether they are paid before or after the decedent's death.

How to Figure Your Deduction

To figure your medical expense deduction, complete Schedule A (Form 1040). If
you need more information on itemized deductions or you are not sure whether
you can itemize, see Chapters 20 and 21. The overall limit on itemized
deductions discussed in those chapters does not apply to medical expenses.

Write in the amounts you paid for medical and dental care expenses after
you reduce these expenses by any payments received from insurance or other
sources. You can deduct only your medical and dental expenses that are more
than 7.5% of your adjusted gross income (line 32, Form 1040).

Write the amount of your unreimbursed medical expenses on line 1, Schedule A
(Form 1040). For an example, see Medical and Dental Expenses (lines 1─4,
Schedule A) under Itemized Deductions (Schedule A) in Chapter 39.

Separate returns. If you and your spouse do not live in a community property
state and you file separate returns, each of you can include only the medical
expenses you actually paid. Any medical expenses paid out of a joint checking
account in which you and your spouse have the same interest are considered
to have been paid equally by each of you, unless you can show otherwise.

If you and your spouse live in a community property state and file separate
returns, any medical expenses paid out of community funds are divided equally.
Each of you should include half the expenses. If medical expenses are paid out
of the separate funds of one spouse, only the spouse who paid the medical
expenses can include them. For more information, see Publication 555,
Federal Tax Information on Community Property.

When to include. You can include medical expenses only in the year you paid
them (but see Decedents, earlier). If you pay medical expenses by check,
the day you mail or deliver the check is the date of payment. If you use a
"pay-by-phone" account, the date reported on the statement of the financial
institution showing when payment was made is the date of payment. You can
include medical expenses you charge to your credit card in the year the
charge is made. It does not matter when you actually pay the amount charged.

Reimbursements

You must reduce your total medical expenses for the year by all reimbursements
for medical expenses that you receive from insurance or other sources during
the year. This includes payments from Medicare.

Do not reduce medical expenses by any payment you received for loss of
earnings, damages for personal injury, or other loss unrelated to medical
costs.

Excess reimbursement. If the total reimbursement you received during the year
is the same as or more than your total medical expenses for the year, you
cannot take a medical deduction. The following discussions explain whether
you need to include excess reimbursement in income.

Premiums paid by you. If you paid the entire premium for your medical
insurance or all of the cost of a similar plan, do not include an excess
reimbursement in your gross income.

Premiums paid by you and your employer. If both you and your employer
contribute to your medical insurance plan and your employer's contributions
are not included in your gross income, you must include in your gross
income the part of an excess reimbursement that is from your employer's
contributions.

Example. You are covered by your employer's medical insurance policy. The
annual premium is $2,000. Your employer pays $600 of that amount and the
balance of $1,400 is taken out of your wages. The part of any excess
reimbursement you receive under the policy that is from your employer's
contributions is figured like this:

    Total annual cost of policy ...................     $2,000
    Amount paid by employer .......................     $  600
    Employer's contribution in relation to the
    annual cost of the policy ($600/$2,000) .......        30%

You must include in your gross income 30% of the excess reimbursement you
received for medical expenses under the policy.

Premiums paid by your employer. If your employer or your former employer
pays the total cost of your medical insurance plan and your employer's
contributions are not included in your income, you must report all excess
reimbursements as income.

More than one policy. If you are covered under more than one policy, the costs
of which are paid by both you and your employer, you must first divide the
medical expense among the policies to figure the excess reimbursement from
each policy. Then divide the policy costs to figure the part of any excess
reimbursement that is from your employer's contribution.

Example. You are covered by your employer's health insurance policy. The
annual premium is $1,200. Your employer pays $300, and the balance of $900
is deducted from your wages. You also paid the entire premium of $250 for a
personal health insurance policy.

During the year, you paid medical expenses of $3,600. In the same year, you
were reimbursed $2,500 under your employer's policy and $1,500 under your
personal policy.

You figure the part of any excess reimbursement you receive that is from your
employer's contribution like this:

    Reimbursement from employer's policy ..........     $2,500
    Reimbursement from your policy ................      1,500
                                                     __________
    Total reimbursement .......................         $4,000
                                                     ==========

    Amount of medical expenses from your policy ...     $1,350
    Amount of medical expenses from your employer's
    policy ........................................      2,250
                                                     __________
    Total medical expenses ....................         $3,600
                                                     ==========

    Excess reimbursement from your employer's
    policy ($2,500 - $2,250) ....................         $250
                                                     ==========

Because both you and your employer contribute to the cost of this policy,
you must divide the cost to determine the excess reimbursement from your
employer's contribution.

     Employer's contribution in relation to the
       annual cost of the policy ($300 ÷ $1,200)         25%

You must report $62.50 as income from your employer's contribution. This
is 25% of the $250 excess reimbursement that is from your employer's policy.

Reimbursement in a later year. If you are reimbursed in a later year for
medical expenses you deducted in an earlier year, you must report as income
the amount you received from insurance or other sources that is equal to, or
less than, the amount you previously deducted as medical expenses. However,
you do not have to report the reimbursement up to the amount of the deduction
that did not reduce your tax for the earlier year. For more information about
the recovery of an amount that you claimed as an itemized deduction in an
earlier year, see Recoveries in Chapter 13.

Medical expenses not deducted. If you did not deduct a medical expense in the
year you paid it because you did not itemize deductions or because your
medical expenses were not more than the 7.5% limit, do not include in income
the reimbursement for this expense that you receive in a later year. However,
if the reimbursement is more than the expense, see Excess reimbursement,
earlier.

Example. In 1991, you have medical expenses of $500. You cannot deduct the
$500 because it is not more than 7.5% of your adjusted gross income. If, in
a later year, you are reimbursed for any of the $500 medical expenses, you do
not include that amount in your gross income.

Damages. If you receive an amount in settlement of a personal injury suit, the
part that is for medical expenses deducted in an earlier year is included as
income in the later year if your medical deduction in the earlier year reduced
your income tax in that year. See Reimbursement in a later year, earlier.

Future medical expenses. If you receive an amount in settlement of a damage
suit for personal injuries that is properly allocable or determined to be
for future medical expenses, you must reduce any medical expenses for these
injuries until the amount you received has been completely used.