Medical Tax Deduction and HSA reimbursement: looking for a mathematical example

[jollystomper]

WARNING: There WILL be math!

I am trying to quantify the impact of deducting medical expenses and HSA reimbursements eligible. My understanding is that there is no "double dipping" - i.e., you cannot use your HSA to reimburse for expenses you deducted from your taxes. However, I have searched for, and cannot find, a step-by-step example, so I am hoping the good folks here can help me out.

To make the math easier, I will use round numbers.

Edited to add: ASSUMPTION: This deduction, along with your other itemized deductions, exceed the standard deduction, so there is a benefit.


Start with:

- AGI (1040 line 11): $100,000
- Medical insurance premiums : $10,000, non-COBRA. Not eligible for HSA reimbursement.
- Medical doctor costs: $5,000. Eligible for HSA reimbursement.

Total medical costs: $15,000

Currently one can deduct medical costs that exceed 7.5% of your AGI.
- In this example, 7.5% of $100,000 = $7,500.
- With total medical costs at $15,000, $15,000 - $7,500 = $7,500 can be used for an itemized deduction.

I have a couple of scenarios that I need clarifying:

1) If only the medical insurance premiums are used to calculate the tax deduction, then $10,000 - $7,500 = $2,500 is the itemized tax deduction. Then the $5,000 of medical doctor costs are still eligible for HSA reimbursement, correct?

2) If the total medical costs were used and the $7,500 deduction taken, can one "pro-rate" the total medical costs to still have a portion of the medical costs eligible for HSA reimbursement? In this example, the potential HSA reimbursable amount is 33% of total medical costs ($5,000/$15,000). Therefore, can one take the position that 33% of the amount deducted ($2,475) apply to medical doctor costs, and that the balance of the $5,000 ($5,000 - $2,475 = $2,525) is still eligible for HSA reimbursement?

Any input on the above, and or/pointers to sites which have examples of similar calculations, is welcome. I am looking for valid (if any) calculations. This is not something I face this tax year, but it might be a consideration in future years.

 

[SecondCor521]

First, the elephant in the room:

Even if you have medical expenses in excess of 7.5% of AGI to deduct, that only helps you if those deductible medical expenses plus your other itemized deductions exceed the standard deduction, and only to the extent that they do.

If you're single, the typical standard deduction this year is $12,400 (more if you're over 65 or blind). So even in the example you give, the $12,400 is greater than the $7,500 itemized deduction and is essentially worthless. Even if your medical expenses were $20,000, that would only result in a ($20,000 - $7,500 = $12,500) itemized deduction, which is only $100 better than just not doing anything.

So then on to your questions:

1. Correct. But as noted above, those $10K in premiums are pretty much worthless from a tax point of view.

2. No. You can either take them as an itemized deduction on Schedule A, or reimburse them from the HSA, but not both. It'll say that somewhere in the instructions for Form 8889. Edit: https://www.irs.gov/pub/irs-pdf/i8889.pdf page 6, column 3, under the instructions for Line 15: "You cannot take a deduction on Schedule A (Form 1040) for any amount you include on line 15."

 

[jollystomper]

First, the elephant in the room:

Even if you have medical expenses in excess of 7.5% of AGI to deduct, that only helps you if those deductible medical expenses plus your other itemized deductions exceed the standard deduction, and only to the extent that they do.

I understand that. I have nowadded that as an assumption - that you are able to deduct your medical expenses since it along with your other expenses exceed the standard deduction. So they are still worthwhile for case #1. Thanks for the link regarding case #2.

 

[RunningBum]

I tried to plead a similar case in this thread: https://www.early-retirement.org/forums/f28/distributions-from-an-hsa-88977.html and was convinced I couldn't even do any kind of prorated double dipping.

 

[Sunset]

First, the elephant in the room:

Even if you have medical expenses in excess of 7.5% of AGI to deduct, that only helps you if those deductible medical expenses plus your other itemized deductions exceed the standard deduction, and only to the extent that they do.

If you're single, the typical standard deduction this year is $12,400 (more if you're over 65 or blind). So even in the example you give, the $12,400 is greater than the $7,500 itemized deduction and is essentially worthless. Even if your medical expenses were $20,000, that would only result in a ($20,000 - $7,500 = $12,500) itemized deduction, which is only $100 better than just not doing anything.

This example is great.

Of course, many folks would also have added to their itemized deductions:

• property tax,
• mortgage interest,
• prescription costs paid from pocket,
• mileage allowance to doctor (and pharmacy to get prescriptions?).

I had to comment as DFIL, who normally takes just the personal deduction has had a lot of medical expenses, and when I add in property tax, etc.. I think he will save more this year doing the itemization.

Note: I have not done taxes this year, and it's been years since itemizing.

 

[SecondCor521]

I understand that. I have nowadded that as an assumption - that you are able to deduct your medical expenses since it along with your other expenses exceed the standard deduction. So they are still worthwhile for case #1. Thanks for the link regarding case #2.

Yes, so with that added assumption then for case #1, you could either deduct the $5K in doctor costs as an itemized deduction on Schedule A *or* reimburse yourself for them from your HSA (but not both per the link I provided earlier about case #2). Either is permissible, so it'd be up to you to decide which was better for your situation.

 

[SecondCor521]

This example is great.

Of course, many folks would also have added to their itemized deductions:

• property tax,
• mortgage interest,
• prescription costs paid from pocket,
• mileage allowance to doctor (and pharmacy to get prescriptions?).

I had to comment as DFIL, who normally takes just the personal deduction has had a lot of medical expenses, and when I add in property tax, etc.. I think he will save more this year doing the itemization.

Note: I have not done taxes this year, and it's been years since itemizing.

Property and sales taxes are still limited by the SALT cap of $10K IIRC.

Yes, there is a mileage deduction for medical. It's 17 cents per mile for 2020 and 16 cents per mile for 2021.

There still may be opportunities for some taxpayers (like your DFIL maybe) to bunch deductions. Paying annual property taxes in early January and late December in alternating years and taking the standard deduction in the off years will usually generate some savings.