Beware of This Tax Mistake That Can Cost You Big Time
Every tax season, the IRS comes out with various warnings and reminders to taxpayers about how to avoid problems with their filings. Usually, this is in response to common mistakes that taxpayers actually make or scams/misinformation being propagated by unscrupulous or erroneous promoters.
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One of these warnings focuses on the reimbursement of general expenses for health and welfare. If you have a health savings account, a flexible spending account or other type of health reimbursement account, this could affect your tax filing. Here's what you need to know.
Where Does the IRS Stand on the Issue of Medical Expense Reimbursement?
Accounts like HSAs and FSAs are a great way for Americans to get tax-advantaged reimbursement of qualifying medical expenses. HSAs, for example, provide a tax deduction on contributions, tax-free growth and tax-free distributions when used for appropriate expenses. The same is true for FSAs, although the tax benefit on contributions comes from direct salary deductions.
What the IRS is emphasizing, however, is that not all so-called "medical expenses" qualify for reimbursement. According to IRS commissioner Danny Werfel, "Legitimate medical expenses have an important place in the tax law that allows for reimbursements. But taxpayers should be careful to follow the rules amid some aggressive marketing that suggests personal expenditures on things like food for weight loss qualify for reimbursement when they don't qualify as medical expenses."
What Exactly Is the Issue?
Essentially, the IRS is cracking down on personal expenses being reimbursed as qualifying medical expenses. Specifically, the IRS is responding to companies that are erroneously promoting various wellness, exercise and food for weight loss as being "medically necessary and reimbursable expenses," rather than the personal expenses that they really are.
According to a statement from the IRS, merely getting a doctor's note based on self-reported health information is not enough to convert non-medical expenses into qualified medical expenses.
What Are the Penalties?
If you take a distribution from an HSA and use it for a nonqualifying medical expense, you'll generally be responsible for ordinary income tax on that distribution, plus a 20% penalty. If you're 65 or older, you can avoid the penalty, but you'll still have to pay income tax. For an FSA, you're not supposed to be allowed to make such a purchase. However, if you do, you'll be responsible for paying that money back to the account.
What Are Examples of Legitimate, Qualifying Expenses?
There are literally hundreds of qualifying medical expenses for HSA and FSA reimbursement. Here's a quick overview, broken down by type of expense, along with a list of items specifically not eligible. If there is an asterisk next to the expense, that means that in certain circumstances it may not qualify for reimbursement.
Common Qualifying Expenses
Acupuncture
Ambulance
Artificial limbs
Artificial teeth*
Birth control treatment
Blood sugar test kits for diabetics
Breast pumps and lactation supplies
Chiropractor
Contact lenses and solutions*
Crutches
Dental treatments (including x-rays, cleanings, fillings, sealants, braces and tooth removals*)
Doctor's office visits and co-pays
Drug prescriptions
Eyeglasses (Rx and reading)*
Fluoride treatments*
Feminine hygiene products
Fertility enhancement (including in-vitro fertilization)
Flu shots
Guide dogs
Hearing aids and batteries
Infertility treatment
Inpatient treatment at a therapeutic center for alcoholism or drug addiction
Insulin
Laboratory fees
Laser eye surgery*
Medical alert bracelet
Medical records charges
Midwife
Occlusal guards to prevent teeth grinding
Orthodontics*
Orthotic Inserts (custom or off the shelf)
Over-the-counter medicines and drugs (see more information below)
Personal protective equipment (PPE) like masks and hand sanitizer
Physical therapy
Psychiatric care
Psychoanalysis
Psychologist
Special education expenses that include tutoring for a child with learning disabilities caused by mental impairments (recommended by doctor)
Speech therapy
Stop-smoking programs (including nicotine gum or patches, if prescribed)
Surgery, excluding cosmetic surgery
Vaccines
Vasectomy
Vision exam*
Walker, cane
Wheelchair
Common Qualifying Over-the-Counter Medications
Acid controllers
Acne medicine
Aids for indigestion
Allergy and sinus medicine
Anti-diarrheal medicine
Baby rash ointment
Cold and flu medicine
Eye drops*
Feminine antifungal or anti-itch products
Hemorrhoid treatment
Laxatives or stool softeners
Lice treatments
Motion sickness medicines
Nasal sprays or drops
Ointments for cuts, burns or rashes
Pain relievers, such as aspirin or ibuprofen
Sleep aids
Stomach remedies
Potentially Qualifying Medical Expenses or Services With Letter of Medical Necessity
Weight-loss program only if it is a treatment for a specific disease diagnosed by a physician (e.g., obesity, hypertension, heart disease)
Compression hosiery/socks, anti embolism socks or hose
Massage treatment for specific ailment or diagnosis
CPR classes for adult or child
Improvements or special equipment added to a home or other capital expenditures for a physically handicapped person
Eligible Dependent Care Expenses
Au pair services
Babysitting services
Before- and after-school programs
Custodial or eldercare expenses, in-home or daycare center (not medical care)
Nursery school
Pre-kindergarten
Summer day camp (not educational in nature)
Note: Clothing, food/meals, overnight camp and kindergarten and higher education/tuition expenses for dependents are not eligible.
Common Nonqualifying Expenses
Aromatherapy
Baby bottles and cups
Baby oil
Baby wipes
Breast enhancement
Cosmetics and skin care
Cotton swabs
Dental floss
Deodorants
Hair re-growth supplies and/or services
Health club membership dues
Humidifier
Lotion
Low-calorie foods
Mouthwash
Petroleum jelly
Shampoo and conditioner
Spa salts
As always, it is recommended to consult with a tax professional if you have any questions.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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