Standard mileage rate. The standard mileage rate allowed for out-of-pocket expenses for a car when you use it for medical reasons is:

See Transportation under What Medical Expenses Are Includible.

Dependent. Beginning in 2005, you will use new rules to determine if a person qualifies as your dependent. See Dependent under Whose Medical Expenses Can You Include.

Health coverage tax credit. There is a credit for health insurance premiums paid by certain workers who are displaced by foreign trade or who are receiving a pension from the Pension Benefit Guaranty Corporation. For more information, see Health Coverage Tax Credit in chapter 37.

This chapter will help you determine:

Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. They also include dental expenses.

Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. Do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.

Medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract.

You can include only the medical and dental expenses you paid this year, regardless of when the services were provided. 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 “online” 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. If you use a credit card, include medical expenses you charge to your credit card in the year the charge is made, not when you actually pay the amount charged.

You can deduct only the amount of your medical and dental expenses that is more than 7.5% of your adjusted gross income (Form 1040, line 38).

In this chapter, the term “7.5% limit” is used to refer to 7.5% of your adjusted gross income. The phrase “subject to the 7.5% limit” is also used. This phrase means that you must subtract 7.5% (.075) of your adjusted gross income from your medical expenses to figure your medical expense deduction.

You can generally include medical expenses you pay for yourself as well as those you pay for someone who was your spouse or your dependent either when the services were provided or when you paid for them. There are different rules for decedents and for individuals who are the subject of multiple support agreements.

Dependent

You can include medical expenses you paid for your dependent. For you to include these expenses, the person must have been your dependent either at the time the medical services were provided or at the time you paid the expenses. A person generally qualifies as your dependent for purposes of the medical expense deduction if both of the following requirements are met.

1. The person was a qualifying child or a qualifying relative, and

2. The person was a U.S. citizen or national, or a resident of the United States, Canada, or Mexico. If your qualifying child was adopted, see Exception for adopted child.

Exception for adopted child.   If you are a U.S. citizen or U.S. national and your adopted child lived with you as a member of your household for 2005, that child does not have to be a U.S. citizen or national or a resident of the United States, Canada, or Mexico.

Qualifying Child

A qualifying child is a child who:

1. Is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, your grandchild, niece, or nephew),

2. At the end of 2005 was:

   1. Under age 19,

   2. Under age 24 and a full-time student, or

   3. Permanently and totally disabled,

3. Lived with you for more than half of 2005, and

4. Did not provide over half of his or her own support for 2005.

Adopted child.   A legally adopted child is treated as your own child. This includes a child lawfully placed with you for legal adoption.

  You can include medical expenses that you paid for a child before adoption if the child qualified as your dependent when the medical services were provided or when the expenses were paid.

  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 provided you clearly substantiate that the payment is directly attributable to the medical care of the child.

  But if you pay the agency or other person for medical care that was provided and paid for before adoption negotiations began, you cannot include them as medical expenses.

  

You may be able to take a credit or exclusion for other expenses related to adoption. See the Instructions for Form 8839 , for more information.

Child of divorced or separated parents.   For purposes of the medical and dental expenses deduction, a child of divorced or separated parents can be treated as a dependent of both parents. Each parent can include the medical expenses he or she pays for the child, even if the other parent claims the child's dependency exemption, if:

1. The child is in the custody of one or both parents for more than half the year,

2. The child receives over half of his or her support during the year from his or her parents, and

3. The child's parents:

   1. Are divorced or legally separated under a decree of divorce or separate maintenance,

   2. Are separated under a written separation agreement, or

   3. Live apart at all times during the last 6 months of the year.

This does not apply if the child's exemption is being claimed under a multiple support agreement.

Qualifying Relative

A qualifying relative is a person:

1. Who is your:

   1. Son, daughter, stepchild, foster child, or a descendant of any of them (for example, your grandchild),

   2. Brother, sister, or a son or daughter of either of them,

   3. Father, mother, or an ancestor or sibling of either of them (for example, your grandmother, grandfather, aunt, or uncle),

   4. Stepbrother, stepsister, stepfather, stepmother, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law, or

   5. Any other person (other than your spouse) who lived with you all year as a member of your household if your relationship does not violate local law,

2. Who was not a qualifying child (see Qualifying Child earlier) of any other person for 2005, and

3. For whom you provided over half of the support in 2005. But see Children of divorced or separated parents, earlier and Support claimed under a multiple support agreement, next.

Support claimed under a multiple support agreement.   If you are considered to have provided more than half of a qualifying relative's support under a multiple support agreement, you can include medical expenses you pay for that relative. 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.

  For rules regarding what expenses you can include this year, see What Expenses Can You Include This Year, earlier.

  Any medical expenses paid by others who joined you in the agreement cannot be included as medical expenses by anyone. However, you can include the entire unreimbursed 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 treat your mother as your dependent. You paid all of her medical expenses. Your brothers reimbursed 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 without receiving any reimbursement, you can include the amount you paid for her medical expenses in your medical expenses.

Decedent

Medical expenses paid before death by the decedent are included in figuring any deduction for medical and dental expenses on the decedent's final income tax return. This includes expenses for the decedent's spouse and dependents as well as for the decedent.

The survivor or personal representative of a decedent can choose to treat certain expenses paid by the decedent's estate for the decedent's medical care as paid by the decedent at the time the medical services were provided. The expenses must be paid within the 1-year period beginning with the day after the date of death. If you are the survivor or personal representative making this choice, you must attach a statement to the decedent's Form 1040 (or the decedent's amended return, Form 1040X) saying that the expenses have not been and will not be claimed on the estate tax return.

Qualified medical expenses paid before death by the decedent are not deductible if paid with a tax-free distribution from any Archer MSA or health savings account.

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

What if you pay medical expenses of a deceased spouse or dependent?   If you paid medical expenses for your deceased spouse or dependent, include them as medical expenses on your Form 1040 in the year paid, whether they are paid before or after the decedent's death. The expenses can be included if the person was your spouse or dependent either at the time the medical services were provided or at the time you paid the expenses.

Use Table 21-1 in this chapter as a guide to determine which medical and dental expenses you can include on Schedule A (Form 1040). See Publication 502 for information about other expenses you can include.

You can include in medical expenses only those amounts paid during the taxable year for which you received no insurance or other reimbursement.

Insurance Reimbursement

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.

Even if a policy provides reimbursement for only certain specific medical expenses, you must use amounts you receive from that policy to reduce your total medical expenses, including those it does not provide reimbursement for.

Example.

You have insurance policies which 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).   A health reimbursement arrangement is an employer-funded plan that reimburses employees for medical care expenses and allows unused amounts to be carried forward. An HRA is funded solely by the employer and the reimbursements for medical expenses, up to a maximum dollar amount for a coverage period, are not included in your income.

Other reimbursements.   Generally, you do not reduce medical expenses by payments you receive for:

• Permanent loss or loss of use of a member or function of the body (loss of limb, sight, hearing, etc.) or disfigurement to the extent the payment is based on the nature of the injury without regard to the amount of time lost from work, or

• Loss of earnings.

  You must, however, reduce your medical expenses by any part of these payments that is designated for medical costs. See How Do You Figure and Report the Deduction on Your Tax Return, later.

  For how to treat damages received for personal injury or sickness, see Damages for Personal Injuries, later.

You do not have a medical deduction if you are reimbursed for all of your medical expenses for the year.

Excess reimbursement.   If you are reimbursed more than your medical expenses, you may have to include the excess in income. You may want to use Figure 21-A to help you decide if any of your reimbursement is taxable.

Premiums paid by you.   If you pay the entire premium for your medical insurance or all of the costs of a plan similar to medical insurance, you 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 your excess reimbursement that is from your employer's contribution.

  See Publication 502 to figure the amount of the excess reimbursement you must include in gross income.

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 the reimbursement as income up to 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 12.

  

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Medical expenses not deducted.   If you did not deduct a medical expense in the year you paid it because your medical expenses were not more than 7.5% of your adjusted gross income, or because you did not itemize deductions, do not include the reimbursement up to the amount of the expense in income. However, if the reimbursement is more than the expense, see Excess reimbursement, earlier.

Example.

Last year, you had 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 in medical expenses, you do not include that amount in your gross income.

If you receive an amount in settlement of a personal injury suit, part of that award may be for medical expenses that you deducted in an earlier year. If it is, you must include that part in your income in the year you receive it to the extent it reduced your taxable income in the earlier year. See Reimbursement in a Later Year, discussed earlier.

Once you have determined which medical care expenses you can include, you figure and report the deduction on your tax return.

If you are disabled, you can take a business deduction for expenses that are necessary for you to be able to work. If you take a business deduction for these impairment-related work expenses, they are not subject to the 7.5% limit that applies to medical expenses.

You are disabled if you have:

If you were self-employed and had a net profit for the year, were a general partner (or a limited partner receiving guaranteed payments), or received wages from an S corporation in which you were a more than 2% shareholder (who is treated as a partner), you may be able to deduct, as an adjustment to income, all of the amount paid for medical and qualified long-term care insurance on behalf of yourself, your spouse, and dependents.

The insurance plan must be established under your trade or business, and you cannot take this deduction to the extent that the amount of the deduction is more than your earned income from that trade or business.

You cannot take this deduction for any month in which you were eligible to participate in any subsidized health plan maintained by your employer or your spouse's employer. This rule is applied separately to plans that provide long-term care insurance and plans that do not provide long-term care insurance.

If you qualify to take the deduction, use the Self-Employed Health Insurance Deduction Worksheet in the Form 1040 instructions to figure the amount you can deduct. But if any of the following applies, do not use the worksheet.

If you cannot use the worksheet in the Form 1040 instructions, use the worksheet in Publication 535, Business Expenses, to figure your deduction.