Medical Expense Deductions

Some expenses, like the costs of at-home nursing care for a disabled dependent, would ordinarily be deductible as medical expenses. If they enable the taxpayer to be gainfully employed, they can also qualify as employment-related dependent care.

However, you can't use the same expenses for both the medical deduction and the dependent care credit. You'll have to decide which tax benefit will help you more.

Generally speaking, if you have a choice, it's better to maximize your child or dependent care credit up to the applicable dollar limitations ($2,400 for one qualifying person, or $4,800 for two or more). If your expenses exceed this limitation, any excess that qualifies as a medical deduction should be treated as such.

Remember that only medical expenses that exceed 7.5 percent of your adjusted gross income are deductible, and high-income taxpayers may lose some of their deductions above 7.5 percent. If you do have sufficient medical expenses to exceed the 7.5 percent threshold, and your tax bracket is 27.5 percent or higher, you may be better off claiming the expenses as a medical deduction.

Example During 2002, John and Mary Davis paid $10,000 of work-related expenses for the care of their physically handicapped daughter. The work-related expenses were for services performed in the Davis home and qualified as medical expenses. The Davises adjusted gross income for 2002 was $60,000. If they take the maximum of $2,400 of these expenses into account for purposes of the dependent care credit, they can claim a 20% credit of $480, and treat the balance, or $7,600, as medical expenses. Because the Davises had no other medical expenses, they can deduct $3,100 ($7,600 minus 7.5% of $60,000, or $4,500) as a medical expense. Since they are in the 27% bracket, the $3,100 deduction saves them $837 in taxes. Total tax savings: $480 + $837 = $1,317. However, if they claim the full $10,000 as a medical expense, subtracting the 7.5% of AGI amount ($4,500) leaves a deduction of $5,500. In the 27% bracket, this deduction would save $1,485 in taxes. The Davises are better off forgoing the child and dependent care credit, and instead claiming the full medical expense deduction for their daughter's expenses.