There's good news and bad news if you use over-the-counter medications. IRS rules for medical expense deductions do not allow non-prescription drugs to be deducted on Schedule A. The one exception to that rule is insulin. You may deduct the cost of insulin, even though it does not require a prescription. If you use other OTC drugs, don't give up yet. If you have a health flexible spending account or health savings account you might be able to purchase over-the-counter drugs using those pre-tax dollars.
Affordable Care Act
President Obama's health bill made sweeping changes to the way medical expenses are paid, in an effort to cover more items than previous legislation allowed. Since Jan. 1, 2011, taxpayers have been allowed to use funds from their health FSA or HSA to pay for nonprescription drugs. The caveat to this is that you must have a prescription from a doctor for any medication that is normally available without a prescription in order to use the funds. So, if your doctor decides you need aspirin or another OTC drug, you will need to ask for a prescription.
Health Reimbursement Arrangements and Flexible Spending Accounts
Health reimbursement arrangements and health flexible spending accounts enable taxpayers or their employers to place a portion of their pre-tax dollars into a special account from which they pay medical expenses. The flip side to these programs is that you cannot take a Schedule A medical deduction for any item you pay for from either an HRA or health FSA. You can't have your cake and eat it too. But these programs offer better tax breaks for most people because they are not subject to the 7.5 percent of adjusted gross income minimum for health deductions, and you don't have to itemize your deductions to get the reimbursement.
Medical Savings Accounts
Many employers offer HRA sor FSAs as benefits, but if you're self-employed or even unemployed, you can set up an Archer Medical Savings Account at most banks or credit unions. You'll be able to deduct the amount to contribute into the account from your taxable income. Then, as long as you get a prescription for the OTC drugs or medications, you will be able to use a distribution from the Archer MSA to pay for it. IRS Publication 969 (Health Savings Accounts and Other Tax-Favored Health Plans) contains additional information and requirements for MSA eligibility.
Which Forms to File
If your employer offers a health care reimbursement program, the amounts you or your employer contribute to it are excluded from your taxable income on Form W-2 but will appear in box 12 with code W. You will also need to file Form 8889 if your employer made any contribution on your behalf.
If you have an Archer MSA, you will file Form 8853 if you use any proceeds from the account for eligible medical expenses. If you use funds for non-eligible expenses, you will be required to pay tax on the distribution as well as a 20 percent penalty, so it's wise to make sure distributions are used only for allowable expenses.
Naomi Smith has been writing full-time since 2009, following a career in finance. Her fiction has been published by Loose Id and Dreamspinner Press, among others. She holds a Master of Science in financial economics from the London School of Economics and a Bachelor of Arts in political economy from the University of California, Berkeley.