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

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 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 do not have a medical deduction if you are reimbursed for all of your medical expenses for the year.

Excess reimbursement. If you are reimbursed more than your medical expenses, you may have to include the excess in income. You may want to use Figure 23-A 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 of the costs of a plan similar to medical insurance, you generally do not include an excess reimbursement in your gross income.

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 an 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.

Amount paid by employer -------------------- Total annual cost of policy

=

Percent of excess reimbursement that is taxable

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:

$600 ----------- $2,000

=

30%

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 personal policy.

You figure the part of any excess reimbursement you receive that is from your employer's contribution as follows:

Step 1.
Reimbursement from employer's policy	$2,400
Reimbursement from your policy	1,600
Total reimbursement	$4,000
Amount of medical expenses from your policy [($1,600 ÷ $4,000) × $3,600 total medical expenses]	$1,440
Amount of medical expenses from your employer's policy [($2,400 ÷ $4,000) × $3,600 total medical expenses]	2,160
Total medical expenses	$3,600
Excess reimbursement from your employer's policy ($2,400 - $2,160)	$240
Step 2.
Because both you and your employer contributed to the cost of this policy, you must divide the cost to determine the excess reimbursement from your employer's contribution.
Employer's contribution in relation to the annual cost of the policy ($300 ÷ $1,200)	25%
Amount to report as other income on line 21, Form 1040 (25% × $240)	$60

Reimbursement in a later year. If you are reimbursed in a later year for medical expenses you deducted in an earlier year, you must report the reimbursement as income up to the amount you previously deducted as medical expenses. However, do not report as income the 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 Itemized Deduction Recoveries in chapter 13.

Medical expenses not deducted. 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 Excess reimbursement, earlier.

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

Settlement of damage suit. If you receive an amount in settlement of a personal injury suit, the part that is for medical expenses deducted in an earlier year is included in income in the later year if your medical deduction in the earlier year reduced your income tax in that year. See Reimbursement in a later year, earlier.

Future medical expenses. If you receive an amount in settlement of a damage suit for personal injuries that is properly allocable or determined to be for future medical expenses, you must reduce any medical expenses for these injuries until the amount you received has been completely used.

---

Previous | Next

Publication 17 | 2001 Tax Year Archives | Tax Help Archives | Home