This is a great question. As the year inches closer and closer to the end, many people have valid, and timely, tax questions and concerns. The other day one of my clients asked me:
“I have a large medical bill of $5,000, should I pay the amount in full so I can deduct it on my taxes? Or is it deductible even if I haven’t paid it yet?”
First, I wanted to resolve her second question of whether or not it is deductible if it has not been paid. Unfortunately the answer is “no.” Medical expenses that have been billed to the client are not deductible on your tax return until paid.
The next question can be a little more difficult to answer. Medical expenses are only deductible on a tax return if a person can itemize deductions. The IRS already allows taxpayers to have what is called a ‘standard’ deduction on their tax return. But some may qualify to have an optional ‘itemized’
deduction to allow for a larger deduction. The problem with this is not everyone has enough qualified expenses to make this deduction worthwhile.
Also, medical expenses are not fully deductible. Only a percentage is allowed to be deducted. So whether or not she should pay this bill will depend on a few factors:
- Will she be able to itemize this year?
- Did she have other medical expenses this year?
- Does she plan to have more medical expenses in the following year?
If the answer to the first question is “no” then whether or not she should pay the bill will strictly come down to finances. The reason being is that if she can’t itemize this year (and paying the bill will not help her itemize) then she should consider paying the medical expense only if she can afford it.
If the answer to the first question is “yes” (or if by paying the medical bill the first answer becomes “yes”), than whether or not she should pay it this year depends on the answer from other two questions. If she had other medical expenses this year and does not plan to have any next year, then it would make sense to pay the medical bill this year in order to maximize her deductions. However, if she does not have any other medical expenses this year but will have more the next year, then it may make more sense to wait until next year to pay this bill.
The IRS allows for some flexibility for the payment of her medical bill in order to maximize the tax deduction. Because a medical expense is not deductible until paid, then she has the option to pay the bill now or wait until the next year. It is important to evaluate all options before simply paying the bill.
Additionally, if she decided it was more beneficial to pay the bill now but did not have the funds to do so, she would be able to pay the medical bill with a credit card and receive the tax deduction at that time. It would not matter if or when she paid the credit card bill.
If you find yourself having more questions than answers when it comes to your deductions, seek advice from a trusted Listo expert.