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

Figure 1. Is Your Excess Medical Reimbursement Taxable?

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.

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 that is based on the nature of the injury without regard to the amount of time lost from work,
• Loss of earnings, or
• Damages for personal injury or sickness.

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

What If Your Insurance Reimbursement Is More Than Your Medical Expenses?

If you are reimbursed more than your medical expenses, you may have to include the excess in income. You may want to use Figure 1 to help you decide if any of your reimbursement will be taxable income.

Premiums paid by you. If you pay the entire premium for your medical insurance or all the costs of a plan similar to medical insurance, and your insurance payments or other reimbursements are more than your total medical expenses for the year, you have excess reimbursement. Generally, you do not include the excess reimbursement in your gross income. However, gross income does include total payments in excess of the per diem limit for qualified long-term care insurance. See Periodic Payments Not Taxed, under What Medical Expenses Are Deductible under Long-Term Care, earlier, for the per diem amounts.

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.

You can figure the percentage of the excess reimbursement you must include in gross income using the following formula.

Example. You are covered by your employer's medical insurance policy. The annual premium is $2,000. Your employer pays $600 of that amount and the balance of $1,400 is taken out of your wages. The part of any excess reimbursement you receive under the policy that is from your employer's contributions is figured as follows.

Therefore, you must include in your gross income 30% (.30) of any excess reimbursement you received for medical expenses under the policy.

Premiums paid by your employer. If your employer or your former employer pays the total cost of your medical insurance plan and your employer's contributions are not included in your income, you must report all of your excess reimbursement as other income.

More than one policy. If you are covered under more than one policy, the costs of which are paid by both you and your employer, you must first divide the medical expense among the policies to figure the excess reimbursement from each policy. Then divide the policy costs to figure the part of any excess reimbursement that is from your employer's contribution.

Example. You are covered by your employer's health insurance policy. The annual premium is $1,200. Your employer pays $300, and the balance of $900 is deducted from your wages. You also paid the entire premium ($250) for a personal health insurance policy.

During the year, you paid medical expenses of $3,600. In the same year, you were reimbursed $2,400 under your employer's policy and $1,600 under your own personal policy.

You can figure the part of the excess reimbursement that is from your employer's contribution by using Worksheet 2.

What If You Receive Insurance Reimbursement in a Later Year?

If you are reimbursed in a later year for medical expenses you deducted in an earlier year, you generally must report the reimbursement as income up to the amount you previously deducted as medical expenses.

However, you do not report as income the amount of 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 Recoveries in Publication 525, Taxable and Nontaxable Income.

Worksheet 2. Taxable Excess Medical Reimbursement When You Have More Than One Health Insurance Policy

What If You Are Reimbursed for Medical Expenses You Did Not Deduct?

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 in income the reimbursement for this expense that you receive in a later year. However, if the reimbursement is more than the expense, see What If Your Insurance Reimbursement Is More Than Your Medical Expenses, earlier.

Example. Last year, you had $500 of medical expenses. 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 of medical expenses, you do not include that amount in your gross income.

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