To figure your medical expense deduction, complete lines 1-4 of Schedule A (Form 1040). If you need more information on itemized deductions or you are not sure whether you can itemize, see chapters 21 and 22.

Write in the amounts you paid for medical and dental care expenses after reducing the amount by payments you received from insurance and other sources. 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 34, Form 1040.

Write the amount of your unreimbursed medical expenses on line 1, Schedule A (Form 1040). For an example, see Publication 502.

Figure 23-A. Excess Medical Reimbursement Algorithm

Separate returns. If you and your spouse live in a noncommunity property state and file separate returns, each of you can include only the medical expenses each 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.

Community property states. 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. If you live in a community property state, are married, and file a separate return, see Publication 555, Community Property.

What expenses can you include in 1998? You can include only the medical and dental expenses you paid this year, regardless of when the services were provided. (But see Decedents, earlier.) If you pay medical expenses by check, the day you mail or deliver the check generally is the date of payment. If you use a "pay-by-phone", or "on-line" account to pay your medical expenses, 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.

Generally, you do not have to reduce medical expenses by any payment you received for loss of earnings or damages for personal injury or sickness.

Excess reimbursement. If you are reimbursed for all of your medical expenses for the year, you do not have a medical deduction.

Premiums paid by you. If you pay the entire premium for your medical insurance or all of the cost of a plan similar to medical insurance, generally 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 contribution.

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 any 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 other 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 ($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 [($1,500 � $4,000) �  $3,600 total medical expenses]	$1,350
Amount of medical expenses from  your employer's policy  [($2,500 � $4,000) � $3,600  total medical expenses]	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%
Amount to report as other income  (25% � $250)	$62.50

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, do not report as income the reimbursement you received up to the amount of your medical deductions 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 Itemized Deduction 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 7.5% of your adjusted gross income, 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 1998, you have medical expenses of $500. You cannot deduct the $500 because it is less 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 in 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.

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