When filing your taxes, your goal may be to eke out the most savings possible. And that makes plenty of sense.
Now, there are different ways you can shave money off of your IRS bill. One is to claim different tax credits, which reduce your tax liability on a dollar-for-dollar basis. Another option is to claim tax deductions you’re entitled to.
Deductions work a little differently from tax credits in that they exempt some of your earnings from taxes. And your associated savings will hinge on the tax bracket you fall into.
A $1,000 tax deduction, for example, will be worth $220 of savings for you if you fall into the 22% tax bracket. But it will be worth $240 if you fall into the 24% tax bracket. The higher an earner you are, the more you might benefit from certain tax deductions.
However, being a higher earner could also make it harder to claim certain deductions. Such is the case with the medical expense deduction, which is known to be a tricky one to calculate. Here’s what you need to know about it.
How the medical expense deduction works
If you spent a lot of money on medical expenses in 2023, you may be eligible for a deduction on this year’s tax return. But to claim a medical expense deduction, you need to:
- Itemize on your tax return
- Have medical expenses that exceeded 7.5% of your adjusted gross income (AGI)
Let’s say your AGI in 2023 was $80,000. This means you can only claim medical expenses beyond the $6,000 mark. Because of this threshold, higher earners may have more trouble qualifying for a medical expense deduction than lower earners.
So here’s how the deduction might work, assuming that $80,000 AGI. If you racked up $5,000 in medical expenses in 2023, you get no deduction. If you racked up $6,000 exactly, you also get no deduction. However, if you racked up $6,500, you get a $500 deduction — because remember, the medical expense deduction only lets you claim any sum you incurred beyond 7.5% of your AGI.
There’s also another catch. If you had money in a health savings account or flexible spending account, and you took withdrawals from one of these accounts to cover some of your medical expenses, those specific bills won’t be deductible. And the reason is because you paid for them with tax-advantaged funds.
It never hurts to get some help
The medical expense deduction can be confusing. Not only do you have to make sure to claim the right amount, but you also need to know which specific expenses of yours count for this purpose. That’s why it could be a good idea to enlist the help of a tax professional when claiming this deduction, since it’s not the most straightforward.
A professional may also be able to identify other tax breaks you’re entitled to. So even if you don’t get much — or anything — out of the medical expense deduction, there may be other savings coming your way.
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