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Medical Expenses

Arizona Residents With Medical Related Expenses!
May 2007

I was really surprised to see so many of my new clients not taking advantage of deducting their medical related expenses on their Arizona tax return. They thought that if their medical related expenses didn’t qualify for deduction on their Federal return, then they would not qualify on their Arizona return.   In fact, you don’t have to qualify for “itemizing” on the Federal side to take advantage of this deduction on the Arizona side.

 

Here is an example:
Based On A 2006 Tax Return Of A Married Couple Filing Jointly

Assume a taxpayer has property taxes, mortgage interest and state income taxes withheld from their W-2, all totaling $5,000.  In addition the taxpayer has $4,000 of medical related expenses.   Together all of this adds up to $9,000 but the Federal “standard” deduction is $10,300 so the taxpayer will deduct the higher of the two amounts ($10,300) on his/her Federal income tax return.  Arizona has it own “standard” deduction of $8,494 but since Arizona allows the taxpayer to deduct medical related expenses ($5000 + $4,000 = $9,000), the taxpayer will deduct the $9000, since it is higher than $8,494.  Therefore the taxpayer had “itemized” deductions on his/her Arizona tax return but took “standard” deduction on his/her Federal individual tax return.   

Let’s assume the taxpayer had $40,000 of Adjusted Gross Income (AGI) and $12,000 of property taxes, mortgage interest and state income taxes. In this case the taxpayer would “itemize” on his Federal income tax return to the tune of $13,008 ($12,000 + $1,008) but based on the taxpayers AGI, only $1,008 of the $4,000 medical related expenses would qualify for a Federal tax deduction.    A different story on the Arizona tax return.  $16,000 ($12,000 + 4,000) would qualify for an Arizona “itemized” deduction.

 

What Medical Related Expenses Qualify?

The key here is whether the medically related expense involves the diagnosis, cure, treatment or prevention of a disease or health condition for you, a spouse or a dependent.  So can I deduct the cost of a Band Aid for a cut?  It can be considered a treatment to cure your health condition.   Can I deduct a fence around my pool to protect my children?  Sounds more like a home improvement and potentially a city compliance code than a medical related expense.   How many times has your medical provider instructed you to take a non-prescribed over the counter item to treat your current health condition?   These items may also qualify for a deduction. Last of all, what about the mileage the taxpayer drives to and from the drug store for these items and prescriptions?  In 2006 the IRS allowed .18 cents/medical mile deduction.   If you drove a total of 1000 miles to and from your MD’s, Dentist, Pharmacies, Eyewear Retailer, Specialist, Chiropractor’s etc., that is an additional $180 of potential deductible medical expense.

A Simple Way of Keeping Track of Medically Related Expenses

Pharmacies by far are the best when it comes to easy to understand “out of pocket” printouts but medical providers like MD’s, Dentist, etc. seem to be way behind in that technology and usually only provide a very confusing report. I suggest one of the following to keep track of your medically related expenses:

  • Obtain a credit card and place a label on the face of the card (approx ½” x 3”) with the words “Medical Related Expenses” or “Medical Expenses”.   Use this credit card only for medically related expenses.    Example: when you are in the drug store and purchase an over-the-counter cough syrup as instructed by your MD and some pictures you had developed, use your personal card for your pictures and your  “Medical Expense” card for your cough syrup.

  • If you don’t want to obtain a credit card, consider opening a checking account strictly for medical expenses.  If possible, set up and fund a savings account. Then have the savings account feed the checking account when funds in the checking account are needed. Obtain a debit card with the checking account and also place a label on the card.  Use only for medically related expenses.

Either way when you go to your wallet for your personal credit card, your “Medical Expense” card will be clearly marked to remind you to use this card for medically related purchases only.   Also, keep in mind the more organized the taxpayer is with their medically related expenses, the less time it will take the taxpayer or the professional tax preparer to prepare the tax return.   Less time usually equals less tax preparation fees.

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