Part 3: The Exact IRS Method for Calculating Medical Deductions — A Clear 2025 Guide

The Exact IRS Method for Calculating Medical Deductions — A Clear 2025 Guide

Many taxpayers assume medical expenses are automatically deductible — but the IRS uses a strict calculation based on your adjusted gross income (AGI) and unreimbursed expenses.
In this Part 3 guide, you’ll learn exactly how to calculate your allowable medical deduction, why most households get a $0 deduction, and how to legally maximize the numbers before switching to HSAs, FSAs, and HRAs for better savings.

1️⃣ The 7.5% AGI Threshold Explained

You may deduct medical expenses only to the extent they exceed 7.5% of your AGI.
This rule alone eliminates deductions for most taxpayers, especially those who take the standard deduction.
The threshold applies to combined expenses for you, your spouse, and your dependents.

2️⃣ Step-by-Step: How the IRS Calculates Your Deduction

Follow these steps to compute your Schedule A medical deduction:

1. Find your AGI (Form 1040, line 11).
2. Calculate 7.5% of AGI.
3. Total all eligible medical expenses.
4. Subtract reimbursements (insurance, HRA, employer programs).
5. Subtract the 7.5% threshold from your unreimbursed total.
6. The remaining amount is your allowed medical deduction.

This is why most taxpayers get no benefit from Schedule A medical deductions.

3️⃣ What Counts as “Unreimbursed Expenses”

The IRS requires you to reduce total expenses by:

• Insurance reimbursements
• Employer HRA reimbursements
• Health benefit programs
• Any third-party payment (accident settlement, etc.)

If reimbursement occurs in a later year, special rules apply (we’ll cover this in Part 5).
Expenses paid with HSA distributions also cannot be deducted.

4️⃣ Common Items Taxpayers Forget to Include

Many items that qualify for medical deductions are overlooked. These include:

• Long-term care services
• Lab tests, X-rays, MRIs
• Dental treatments and orthodontics
• Prescription eyeglasses and contact lenses
• Hearing aids and batteries
• Medically necessary transportation
• Hospital parking and tolls for medical appointments
• Psychiatric and psychological counseling

5️⃣ When Medical Deductions Actually Matter

Despite strict limits, medical deductions become valuable in certain situations:

• High out-of-pocket expenses (e.g., surgery, chronic illness)
• Combination of medical + state/local tax (SALT) + mortgage interest pushing you above the standard deduction
• Self-employed individuals who cannot deduct premiums elsewhere
• Long-term care or nursing facility costs

For most households, however, HSAs and FSAs provide stronger, more predictable tax savings — which is exactly what later parts of this series will focus on.

💬 Frequently Asked Questions