With the combined costs of medical care, health insurance and life insurance rising at more than double the rate of inflation, it's likely that you're looking for a way to reduce your out-of-pocket expenses for these necessary items. In addition to shopping around for the most affordable insurance policies and taking advantage of free or reduced-cost clinics wherever possible, you might also be able to use a powerful tax deduction to offset these financial burdens. However, you'll have to clear some onerous financial thresholds before becoming eligible to do so.
If you clear these thresholds, you'll be eligible to deduct virtually any "healthcare-related" expenses that you've paid during the tax year. This includes out-of-pocket medical expenses that you've paid with a personal credit card as well as your ongoing health insurance premiums. Your prescription-drug co-pays, doctor's visits, coinsurance costs and many other expenses may also be defined as "healthcare-related." However, you might not be able to deduct the cost of non-prescription supplements, vitamins or first-aid equipment.
According to the IRS, any taxpayer whose healthcare-related spending exceeds 7.5 percent of his or her total taxable income is eligible to claim this deduction. Although that sounds like a high bar to clear, so-called healthcare inflation is ensuring that more and more taxpayers qualify with each passing year. If you earn $50,000 per year, you're eligible to claim the healthcare deduction after accumulating just $3,750 in healthcare-related expenses.
Even better, you can use this deduction to offset the cost of your spouse's medical care as well. Whether you file jointly or separately, you can count your family members' healthcare costs as your own. If you can't clear the 7.5 percent threshold on your own, you might be able to do so after factoring in the cost of your spouse's prescription drugs, doctor's visits and health insurance costs.
Unfortunately, you can't offset the cost of your life insurance premiums using a similar deduction. Although the IRS makes no provision for crediting life insurance costs, the agency will almost certainly exempt you from taxation on any life insurance benefits that you receive during the course of the tax year.
It's important to note that you can't apply this deduction to your employer's portion of your health insurance costs. If your employer provides a "matching" contribution to your group health insurance plan, you must subtract this amount from your policy's total cost before factoring it into your calculations. However, this might still entitle you to a sizable insurance-related deduction.