8 Things People with Diabetes Should Know to Save Money on Taxes
If you, your spouse, or a dependent manages a chronic illness like type 1 diabetes or type 2 diabetes, you probably have more annual medical expenses than households without medical conditions. If so, you may be able to claim some additional deductions on your taxes.
Before you start claiming, however, there are some key considerations to keep in mind to avoid getting into any trouble with the IRS. We’ve rounded up the best tips from tax experts to help you file accurately and get a maximum tax refund.
1. What are qualifying deductions based on?
Tax experts say you can only deduct the unreimbursed medical expenses you incur that exceed 7.5 percent of your adjusted gross income for 2021. This number is not the same as your taxable income. Suppose your AGI was $40,000 in 2021. Multiply it by .075 to get $3,000. Therefore, you would deduct the difference if you spent over $3,000 for your medical expenses in 2021. For example, if you paid $3,250, then $250 worth of your unreimbursed medical costs may qualify for deductions. Keep in mind, however, that only certain medical expenses are deductible.
2. What unreimbursed medical expenses are deductible?
Items that qualify for deductions include medications prescribed to you by your doctor to treat your diabetes, other out-of-pocket medical expenses such as additional prescriptions (not over-the-counter), hospital and doctor visit payments, weight-loss programs recommended by your doctor, and most other doctor-recommended treatment programs. Miles driven to and from your doctor even qualify!
The IRS lists most qualifying medical and dental expenses here.
3. Itemizing your deductions
Itemized deductions are expenses allowed to decrease your taxable income. Only itemized deductions qualify. This is another critical reason to track your medical expenses throughout the year. You could end up with a better tax refund. There is a long list of itemized deductions from the IRS. In contrast, standard deductions are a flat-dollar, no-questions-asked deduction in your AGI.
TurboTax explains the process for itemizing your deductions and what form to use here if you plan to use a software program and do it yourself. If you’d rather lean on a tax expert to file for you, you probably don’t have to worry about this.
4. Should I file a standard deduction or itemize deductions?
Nerd Wallet explains that you can either take a standard or itemized deduction. You can’t do both! If your standard deduction is less than your itemized deductions, you should itemize, and vice-versa. Tax filing can be confusing, so enlist the help of a tax expert or guided tax software program to ensure you follow the best deduction route for yourself and have a realistic view of your filing options.
Nerd Wallet reports that standard deductions for this tax filing year for different filing statuses are:
- $12,550 – Single
- $18,800 – Head of Household
- $25,100 – Married, Filing Jointly
- $12,550 – Married, Filing Separately
5. What are the benefits of itemized deductions?
Itemized deductions may get you a more significant tax return than a standard deduction, and there are hundreds of deductions listed by the IRS, some of which you may qualify for. You may even find that you have qualifying deductions beyond your medical expenses, making itemizing your deductions an even better option!
6. What are the cons of itemized deductions?
Even though itemized deductions may get you a more significant tax return than a standard deduction, if you don’t understand how to itemize, you may file incorrectly and incur fees from the IRS down the road as a result. Some tax professionals and software programs may also charge you more for itemizing your deductions. If you don’t have proof of your expenses, you can’t itemize either.
Suppose you want to go back down the road and find all of your receipts and invoices, then all the power to you! But, not everyone has the time, resources, or energy to do this. Some receipts and invoices might be lost to the void of bottomless purses, storage bins, or medical cabinets. You might just be out of luck for this year’s tax filing deadline if you didn’t organize your expenses in 2021.
Don’t fret if you fall into this scenario. Think smarter, and don’t be hard on yourself. Create a spreadsheet and folder now to potentially save money when filing next year’s taxes. Set calendar reminders at the end of each month or every two weeks (whatever works best for your brain) to catalog and consolidate your medical expenses so that you don’t miss out next time.
7. What is the best tax filing service?
You may consider working with a local tax expert to give back to small businesses, but this is not an option for everyone due to varying economic statuses and regional availability. There are many tax-filing software programs available on the Web. If you prefer to use a software program to help you, TaxAct, TurboTax and H&R Block are among the top recommended programs.
Each of these software programs offers plans to review your taxes with an expert live. Prices vary by plan. These could be good options if you prefer virtual meetups due to COVID. Ask around, and do a little window-shopping before committing to a local in-person expert or online tax program. It is difficult to switch services mid-filing.
8. Become a medical expense organizing guru (or appoint someone in your household to be)
If you haven’t thought about organizing your medical expenses until reading this, it’s not too late for next year. You can do anything you set your mind to, including correctly filing and preparing your taxes. You don’t have to be the Marie Kondo of tax filing–you just have to find an organizational method that works for you. Enlist the help of someone in your household, like your significant other, to assist you. Getting someone else involved will help to ensure accountability and increase your chances of getting organized for the 2023 filing deadline.
Even if you end up claiming a standard deduction in 2023, you will at least have the option of itemizing deductions. Knowledge is power and potentially a more considerable tax refund!
Tax filing and budgeting with diabetes go hand-in-hand. Learn more about the impact of diabetes on your budget in this three-part series: