How Do You Treat Reimbursements?(p17)

You can include in medical expenses only those amounts paid during the tax year for which you received no insurance or other reimbursement.

You must reduce your total medical expenses for the year by all reimbursements for medical expenses that you receive from insurance or other sources during the year. This includes payments from Medicare.

Even if a policy provides reimbursement only for certain specific medical expenses, you must use amounts you receive from that policy to reduce your total medical expenses, including those it does not provide reimbursement for.

You have insurance policies that cover your hospital and doctors' bills but not your nursing bills. The insurance you receive for the hospital and doctors' bills is more than their charges. In figuring your medical deduction, you must reduce the total amount you spent for medical care by the total amount of insurance you received, even if the policies do not cover some of your medical expenses.

A health reimbursement arrangement is an employer-funded plan that reimburses employees for medical care expenses and allows unused amounts to be carried forward. An HRA is funded solely by the employer and the reimbursements for medical expenses, up to a maximum dollar amount for a coverage period, are not included in your income.

Generally, you do not reduce medical expenses by payments you receive for:

• Permanent loss or loss of use of a member or function of the body (loss of limb, sight, hearing, etc.) or disfigurement to the extent the payment is based on the nature of the injury without regard to the amount of time lost from work, or
• Loss of earnings.

You must, however, reduce your medical expenses by any part of these payments that is designated for medical costs. See How Do You Figure and Report the Deduction on Your Tax Return, later.

For how to treat damages received for personal injury or sickness, see Damages for Personal Injuries, later.

If you are reimbursed more than your medical expenses, you may have to include the excess in income. You may want to use Figure 1 to help you decide if any of your reimbursement is taxable.

 
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If you pay either the entire premium for your medical insurance or all the costs of a plan similar to medical insurance and your insurance payments or other reimbursements are more than your total medical expenses for the year, you have excess reimbursement. Generally, you do not include the excess reimbursement in your gross income. However, gross income does include total payments in excess of $290 a day ($105,850 for 2010) for qualified long-term care services.

If both you and your employer contribute to your medical insurance plan and your employer's contributions are not included in your gross income, you must include in your gross income the part of your excess reimbursement that is from your employer's contribution.

If you are not covered by more than one policy, you can figure the amount of the excess reimbursement you must include in gross income using Worksheet B. If you are covered under more than one policy, see More than one policy, later. taxmap/pubs/p502-006.htm#en_us_publink1000179098

Worksheet B. Excess Reimbursement Includible in Income When You Have Only One Policy Instructions: Use this worksheet to figure the amount of excess reimbursement you must include in income when both you and your employer contributed to your medical insurance and your employer's contributions are not included in your gross income. 1. Enter the amount contributed to your medical insurance for the year by your employer 1. 2. Enter the total annual cost of the policy 2. 3. Divide line 1 by line 2 3. 4. Enter the amount of excess reimbursement 4. 5. Multiply line 3 by line 4. This is the amount of the excess reimburse- ment you must include as other income on Form 1040, line 21 5.

You are covered by your employer's medical insurance policy. The annual premium is $2,000. Your employer pays $600 of that amount, which is not included in your gross income, and the balance of $1,400 is taken out of your wages. You receive $500 excess reimbursement for your medical expenses. The part of the excess reimbursement you receive under the policy that is from your employer's contributions is figured as follows.

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Worksheet B. Excess Reimbursement Includible in Income When You Have Only One Policy—Illustrated Instructions: Use this worksheet to figure the amount of excess reimbursement you must include in income when both you and your employer contributed to your medical insurance and your employer's contributions are not included in your gross income. 1. Enter the amount contributed to your medical insurance for the year by your employer 1. 600 2. Enter the total annual cost of the policy 2. 2,000 3. Divide line 1 by line 2 3. .30 4. Enter the amount of excess reimbursement 4. 500 5. Multiply line 3 by line 4. This is the amount of the excess reimbursement you must include as other income on Form 1040, line 21 5. 150

You must include in your gross income 30% (.30) of $500, or $150, of the excess reimbursement you received for medical expenses under the policy.

If your employer or your former employer pays the total cost of your medical insurance plan and your employer's contributions are not included in your income, you must report all of your excess reimbursement as other income.

If you are covered under more than one policy, the cost of at least one of which is paid by both you and your employer, you must first divide the medical expenses among the policies to figure the excess reimbursement from each policy. Then divide the policy costs to figure the part of any excess reimbursement that is from your employer's contribution. Any excess reimbursement that is due to your employer's contributions is includible in your income.

You can figure the part of the excess reimbursement that is from your employer's contribution by using Worksheet C. Use Worksheet C only if both you and your employer paid part of the cost of at least one policy. If you had more than one policy, but you did not share in the cost of at least one policy, do not use Worksheet C. taxmap/pubs/p502-006.htm#en_us_publink1000179105

Worksheet C. Excess Reimbursement Includible in Income When You Have More Than One Policy Instructions: Use this worksheet to figure the amount of excess reimbursement you must include as income on your tax return when a) you are reimbursed under two or more health insurance policies, b) at least one of which is paid for by both you and your employer, and c) your employer's contributions are not included in your gross income. If you and your employer did not share in the cost of at least one policy, do not use this worksheet. 1. Enter the reimbursement from your employer's policy 1. 2. Enter the reimbursement from your own policy 2. 3. Add lines 1 and 2 3. 4. Divide line 1 by line 3. 4. 5. Enter the total medical expenses you paid during the year. If this amount is at least as much as the amount on line 3, stop here because there is no excess reimbursement. 5. 6. Multiply line 4 by line 5 6. 7. Subtract line 6 from line 1 7. 8. Enter employer's contribution to the annual cost of the employer's policy 8.   9. Enter total annual cost of the employer's policy 9. 10. Divide line 8 by line 9. This is the percentage of your total excess reimbursement you must report as other income 10. 11. Multiply line 7 by line 10. This is the amount of your total excess reimbursement you must report as other income on Form 1040, line 21 11.

You are covered by your employer's health insurance policy. The annual premium is $1,200. Your employer pays $300 and the balance of $900 is deducted from your wages. You also paid the entire premium ($250) for a personal health insurance policy.

During the year, you paid medical expenses of $3,600. In the same year, you were reimbursed $2,400 under your employer's policy and $1,600 under your own personal policy. The amount you must report as other income is figured as follows.

If you are reimbursed in a later year for medical expenses you deducted in an earlier year, you generally must report the reimbursement as income up to the amount you previously deducted as medical expenses.

However, you do not report as income the amount of reimbursement you received up to the amount of your medical deductions that did not reduce your tax for the earlier year.

For more information about the recovery of an amount that you claimed as an itemized deduction in an earlier year, see Recoveries in Publication 525, Taxable and Nontaxable Income.

If you did not deduct a medical expense in the year you paid it because your medical expenses were not more than 7.5% of your AGI, or because you did not itemize deductions, do not include the reimbursement, up to the amount of the expense, in income. However, if the reimbursement is more than the expense, see What If Your Insurance Reimbursement Is More Than Your Medical Expenses, earlier.

Last year, you had $500 of medical expenses. You cannot deduct the $500 because it is less than 7.5% of your AGI. If, in a later year, you are reimbursed for any of the $500 of medical expenses, you do not include that amount in your gross income.