Legal disclaimer: BioMatrix Specialty Pharmacy and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
If you or a loved one is faced with a chronic illness, you’re most likely familiar with high medical bills, increased living expenses to accommodate the illness, and potentially loss of work or income. While these financial challenges may be unavoidable in many cases, around tax time there may be a little silver lining.
Here we discuss several tax and financial planning items to consider when faced with a chronic condition: setting yourself up for success, deductions, excluded income, and tax credits.
Set Yourself Up for Success
Establish a Revocable Trust
Whether or not you have a chronic illness, it’s important to have a revocable trust in place including an appointed ‘successor trustee(s)’ or an agent under their power of attorney to manage your assets (and taxes) should you not be able to at some point.
Consider Working with a CPA and/or Bookkeeper
Dealing with a chronic illness can make taxes more complicated. Though CPAs and bookkeepers will charge a fee, the amount you could save in taxes may more than make up for the upfront cost. Find a CPA/bookkeeper team you can trust that has an understanding of tax implications for those with chronic illness. Ask your community for their recommendations. It’s important to find these professionals early in the year, well ahead of when taxes are due to help you plan appropriately.
Understand Your Health Insurance Plan
Some insurance plans include Health Savings Accounts (HSA) or Flexible Spending Accounts (FSA) which both have tax benefits. For more information on health insurance plans, click here.
Know Your Dependent Status
You can deduct medical expenses due to illness for any family member listed as a dependent on your tax return. It’s important to know whether you can claim a family member as a dependent so that you can stay organized throughout the year and plan ahead (more on this below).
Keep Organized Throughout the Year, and Plan Ahead
Planning for taxes throughout the year will make tax preparation easier come March and April. Here are some ways you can be proactive.
Stay Organized
Keep all medical bills, receipts, and records in one place, organized by tax year. Also keep track of all medical reimbursements and whether expenses were paid out of a Health Savings Account or an Archer Medical Savings Account.
Get a CPA Involved with Settlements
If you’re involved in a legal suit due to chronic illness—ie against an employer for discrimination, damages, or back wages, it’s important to get a CPA involved before a settlement is reached to help determine tax implications.
Medical/Living Expense Tax Deductions
You may be able to deduct certain medical and living expenses on your federal (and sometimes state) taxes. A tax deduction lowers your taxable income. Typically, deductions are expenses you’ve already paid during a particular tax year which then can be subtracted from your gross income in order to figure out how much total tax you owe. The IRS allows you to deduct a certain amount of medical expenses if you itemize deductions. For 2020, this includes medical expenses that exceeded 7.5% of your adjusted gross income. Your CPA can help you determine whether itemizing deductions vs taking the standard deduction is more beneficial to you as well as how much of your medical expenses can be deducted. It’s important to note that if you’ve taken any reimbursements for medical expenses, you must subtract that from your calculation of total medical expenses.
You can potentially deduct these common medical expenses:
Health insurance premiums (with some exceptions)
Preventative care
Prescription drugs/therapy
Surgeries (deemed essential)
Psychologist/psychiatry visits
Health care facility costs
Illness recovery costs
Transportation costs (if specifically designed to compensate for the chronic illness/disability)
Tuition (if the principal reason for attendance is due to chronic illness/disability)
Home improvements (special equipment and home improvements for medical care)
Impairment-related work expenses (deducted as a business expense, avoiding 7.5% deduction limitation)
Here are just a few types of medical expenses that you cannot deduct:
Cosmetic surgery
Nutritional supplements
Over-the-counter drugs and medicines (unless prescribed by a doctor)
This online ‘interview’ tool on the IRS website can help you identify what medical expenses you are able to deduct: https://www.irs.gov/help/ita/can-i-deduct-my-medical-and-dental-expenses
For more information on medical expenses you can deduct, click here: https://www.irs.gov/taxtopics/tc502
Excluded Taxable Income
Exclusion tax is income that doesn’t have to be included in your gross, taxable income.
Some examples of income that can be potentially excluded as taxable:
Profit from a home sale (if someone resides in any licensed care facility and their home was their primary residence for at least 1 out of the last 5 years)
Disability income
Settlements (sometimes)
Tax Credits
A tax credit is an amount of money that you can subtract from the income taxes you owe. Sometimes tax credits are refundable—i.e. If the credit is more than what you owe, you’ll get a refund from the government. One example of where you may qualify for a medical-related tax credit is called the Premium Tax Credit. You may be eligible if you purchased health insurance through the marketplace. Learn more here.
When it comes to taxes, especially if you or a family member have a chronic condition, it’s important to plan ahead, stay organized, find a CPA/bookkeeper team you can trust, and understand what you can deduct and exclude on your taxable income.
References
Shenkman M. Advising Individuals with Chronic Illnesses. The CPA Journal. https://www.cpajournal.com/2017/05/22/advising-individuals-chronic-illnesses/
Rogers K. Tax Deductions for an Illness. ZACKS. https://finance.zacks.com/tax-deductions-illness-7393.html
Medical, Dental Expenses and Tax Deductions. eFile. https://www.efile.com/medical-deductions/#:~:text=For%20your%202020%20return%20you,your%20medical%20expenses%20are%20%245%2C000.
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