Welcome to the next set of videos looking at itemized deductions. Let's start at a high level. Recall the itemized deductions are also referred to as from AGI deductions or below the line deductions. They're usually more personal in nature, that is not related to running a trade or a business. Typical personal expenses that are deductible from AGI, are medical expenses, some types of taxes, some kinds of interests, and contributions to charitable organizations. Also recall that from AGI deductions only provide a tax benefit if a taxpayer itemizes. That is, if the sum of all the from AGI deductions exceed the standard deduction amount for the particular person's filing status. Finally, itemized deductions are reported separately on Schedule A of the form 1040. Looking at our handy income tax formula where here just after AGI. So in general, medical expenses are deductible if first they are not reimbursed by another party like a health insurance plan. In total, the expenses exceed 7.5 percent of the taxpayer's AGI. If a taxpayer's AGI is $100,000, then the first $7,500 of medical expenses would be non-deductible, but any amount in excess of $7,500 would be an itemized deduction. What qualifies here as a deductible medical expense? Well-qualified expenditures include costs related to the diagnosis, cure, mitigation, treatment, or prevention of disease. Or if the costs are incurred to affect any structure or function of the body of the taxpayer, the spouse or the dependence. A general example here of qualified expenditures is the cost of prescription drugs or insulin. On the other hand, unqualified medical expenses are expenses that may affect the body, but they are not necessary or specific in nature. For example, the cost of general health items such as vitamins, is not a deductible medical expense. The cost of non-prescription drugs like aspirin is also not deductible. Interestingly, unnecessary cosmetic surgery is also not deductible, but necessary cosmetic surgery is deductible. Necessary cosmetic surgery relates to deformities that arise from a congenital abnormality injury or a disfiguring disease. For example, if a person is badly burned in a house fire or a car accident and needs cosmetic surgery to restore his skin, then the cosmetic surgery is considered necessary and would be a qualified medical expense for deduction purposes. On the other hand, a person deciding to get an rhinoplasty, commonly referred to as a nose job, just to personally look more aesthetic while the cost of the rhinoplasty would not be a qualified medical expense. Now let's look at a few special cases of medical expenses. First is the cost of a nursing home. If the primary reason for being in a nursing home is medical, then the cost of the meals and lodging qualify for the medical expense deduction. However, if the primary reason is personal, for example, maybe the taxpayer doesn't have family or family doesn't have the space to take in the person, then only specific medical costs would qualify for the medical expense deduction. Things like seeing a nurse or maybe getting prescription drugs. Another specific cases when a taxpayer, the taxpayer spouse or dependent, attends a special school that addresses improves functions related to mental or physical disabilities. Here the cost of tuition, meals, and lodging are considered qualifying medical expenses and maybe deductible. Again, only cost in excess of 7.5 percent of the taxpayer's AGI will be deductible. In example, near the University of Illinois is the Carl Hospital Auditory Oral School located in Urbana. Per the school's website, the goal of the Carl Auditory Oral School is to support children with hearing loss in developing the spoken language, listening, thinking, and learning skills necessary to return to their neighborhood schools ready to compete alongside normally hearing peers. Because the Carl Auditory Oral School is addressing and improving the functions of hearing impaired children, any tuition, meals, and lodging costs associated with the school would be qualifying medical expenses. Another special case related to medical expenses is the cost of making capital changes or improvements to one's home in order to make it healthier. For example, the question becomes whether installing a swimming pool or a new air conditioner, a dust elimination system, maybe an elevator or other capital changes to the taxpayers house, whether they're qualified medical expenses. Here, the capital medical expenses are qualifying expenses if they're deemed medically necessary by a physician and use primarily by the patient. Here in some cases, the cost and maintenance may also be deductible. Normally when a taxpayer and makes a capital change to their house, like installing a swimming pool or an elevator, it increases the basis of the home and thus is not deductible. However, if a capital expense is made for a permanent improvement, are made for operation and maintenance of an improvement that it may qualify as a medical expense. Here, however, the deductible amount may be limited, specifically only to the extent the cost of the capital change exceeds any increase in the value of one's home, would the expense be eligible for a medical deduction? For example, let's say putting in a swimming pool for us severely arthritic taxpayer with joint pain costs $50,000. However, the increase in the home's value, let's say is only $30,000. In this case, the cost exceeds the increase in the value of the home by $20,000. Therefore, the $20,000 is the eligible medical expense. One exception here is that removing any structural barriers to the home of a disabled person is deemed to add no value. Therefore, the full cost of the capital expense would be eligible for the medical expense deduction. A few additional items here related to medical expenses. To be clear, a taxpayer can deduct the cost of medical care provided to his or her spouse and any dependence. That is, even though the costs may not technically be only addressing the taxpayers health, the costs related to treating or improving the health of other members of the household would be qualifying expenses. So for example, the cost of prescription drugs that I buy for my children would qualify for the medical expense deduction. Finally, sometimes the taxpayer has to travel in order to receive care. Perhaps a particular doctor or treatment is not available in the patient's home town. So he or she has to go to another city to receive treatment. Or the taxpayer receives care in his or her own hometown, but goes to the hospital or doctor very often. Here a deduction is allowed for transportation and lodging related to receiving medical care. The IRS sets of flat mileage rate that's multiplied by the number of medical related miles the taxpayer drives to receive care. Lodging is also a flat rate per person per night. Also a feast for parking in tolls qualified for the medical expense deduction while meals and route are not deductible. So in all, there are quite a number of qualifying expenses for the medical expense deduction. Medical care related to a physician or for dental or mental care, or hospital costs are physical therapy or all qualifying medical expenses. As mentioned earlier, prescription drugs and insulin are qualifying expenses. Special equipment including wheelchairs, artificial limbs, crutches, glasses, contacts, and hearing aids also qualify for the deduction. Transportation for medical care qualifies insurance premiums paid for medical and long-term care insurance coverage also qualify in rehabilitation costs qualify as do weight-loss programs related to obesity. However, a number of items related to a person's health or death do not qualify for the medical expense deduction. Namely funeral expenses don't qualify. Non-prescription or over-the-counter drugs do not qualify except insulin. Baby-related items such as diapers are maternity clothes, don't qualify for the medical expense deduction. Energy, drinks, bottled water, cosmetics, and unnecessary cosmetic surgery all also do not qualify for the deduction. Finally, general health costs also don't qualify, such as vitamins, protein powders, cost, health spas, diets not related to obesity, are costs related to exercising, like a gym membership or running, or swimming or weightlifting. These were not exhaustive lists, but you can see a theme emerging from the deductible and non-deductible expenses. Basically, many of the non-deductible expenses relate to items that are not medically necessary to treat or improve the health of the taxpayer.
