6 Medical Expense Tax Strategies

Utilize a Health Savings Account

One tax-saving strategy specifically for medical expenses that I’ve found highly effective is utilizing a Health Savings Account (HSA) for eligible medical expenses. An HSA is particularly beneficial because it allows you to make pre-tax contributions, which reduce your taxable income. Additionally, the money in the account grows tax-free, and withdrawals for qualified medical expenses are also tax-free, providing a triple tax advantage.

For example, by contributing the maximum allowable amount to my HSA, I effectively lowered my taxable income for the year. When I had a series of unexpected medical expenses, including a costly dental surgery that wasn’t fully covered by insurance, I was able to pay for these expenses using the funds in my HSA. This not only helped manage out-of-pocket costs without impacting my regular cash flow but also reduced my overall tax burden by lowering my taxable income.

The key to maximizing this strategy is to ensure you are aware of the contribution limits and rules for using HSA funds.

Leverage Health Savings or Flexible Spending Account

A powerful tax-saving strategy for medical expenses is using a Health Savings Account (HSA) or Flexible Spending Account (FSA), which allows pre-tax contributions for eligible medical costs. Contributions to an HSA lower taxable income, grow tax-free, and remain tax-free if used for qualifying expenses.

For example, a client with significant out-of-pocket costs from surgery contributed the maximum to their HSA ($7,750 for a family in 2024), reducing their taxable income and using the funds to pay medical bills.

By also “bunching” medical expenses into a single year to exceed the 7.5% of adjusted gross income (AGI) threshold, they qualified for additional deductions, significantly reducing their tax burden while managing healthcare needs effectively.

Use a Flexible Spending Account

One effective tax-saving strategy for medical expenses is leveraging the Flexible Spending Account (FSA), particularly beneficial for those with predictable annual medical costs. An FSA allows you to set aside pre-tax dollars from your salary for use on qualified medical expenses, reducing your taxable income. By contributing to an FSA, I managed to save a significant percentage on taxes, directly proportional to the amount contributed within the IRS limits.

For instance, by allocating $2,500 to my FSA, I effectively reduced my taxable income by the same amount, leading to noticeable tax savings based on my tax bracket. This method is especially useful for covering out-of-pocket expenses such as deductibles, copayments, and prescriptions without incurring taxes on those amounts. To implement this strategy, first confirm your eligibility and the maximum contribution limits with your employer since FSAs are employer-sponsored benefits.

It’s important to plan your FSA contributions carefully, as the funds are generally “use it or lose it” within the calendar year, with some employers offering a grace period or allowing a small carryover into the next year. Keeping track of medical receipts and planning your healthcare expenses can maximize the benefits from an FSA. Additionally, using an FSA can be a strategic way to manage cash flow and budget for health-related expenditures throughout the year. By contributing to an FSA and using the funds for necessary medical expenses, you can significantly reduce your tax liability while ensuring your health care needs are met efficiently.

Itemize Medical Expenses for Tax Deduction

One effective tax-saving strategy for medical expenses is utilizing the medical expense deduction by itemizing on your tax return. Specifically, if your unreimbursed medical expenses exceed 7.5% of your adjusted gross income for the year, the excess amount can be claimed as a deduction. For example, one of my clients incurred significant out-of-pocket costs for a series of necessary surgeries and prescriptions during the year.

By carefully documenting all qualified medical expenses—including doctor visits, prescription medications, and even mileage to and from medical appointments—they were able to itemize these deductions and significantly reduce their taxable income. This ultimately resulted in saving thousands of dollars on their tax bill. It’s crucial to keep accurate records and receipts to ensure every eligible expense is accounted for. With strategic planning and knowing the tax code, medical expenses can transform from a financial burden to an avenue for tax relief.

Set Up a Section 105 Plan

If you are a sole proprietor and your spouse does some work for you (e.g., bookkeeping, answering phones, or website maintenance), there is an opportunity for huge tax savings on medical expenses. You simply need to set up a “Section 105 Plan,” which you can do yourself by creating some documents and doing some accounting of medical expenses throughout the year.

The sole proprietor “pays” the helping spouse by reimbursing them for their—and their family’s—medical expenses. Since the helping spouse is not receiving any wages, they don’t pay any taxes. Since the sole proprietor is not paying wages, they don’t pay any payroll taxes.

All the money used to pay for medical expenses is then listed on Line 14 of the Schedule C as employee benefits, which are an expense that reduces the business profit. Because this is not a deduction but rather a business expense, it saves on ALL taxes, e.g. state and federal income taxes as well as Medicare and Social Security taxes. As one accountant described it, you can “make magic” with a Section 105 plan.

Claim Medical Trip Deductions

I have not had to pay much in taxes because I’ve been claiming medical trip deductions. If you have to go to another state to seek medical treatment you can deduct your transportation, lodging, and meals. For instance, I could have claimed for a trip to Iceland which I had to make for medical purposes only. This catered for my bus fare, my accommodation and my meals. My tax bill went down a lot because of this.

It is great for anyone who needs to go somewhere else to get care since it is easy to navigate. Expenses that you incur during your travels are easy to quantify and before you know it; the expenses have accrued. It is also essential to keep very good records of all the bills and miles you use for medical trips you take every year.

Most of the time, medical travel deductions are simple ways to reduce the amount of tax you will end up paying. This is why I now apply this method each time I need to seek medical attention from a facility that is located out of town.