Medical Expenses
The IRS allows you to deduct medical expenses, but only if the amount is over 7.5% of your adjusted gross income. So for example if you make $100,000, then only the expenses in over $7,500 are deductible. Obamacare changes the threshold to 10% in 2013.
If you have sizeable medical expenses such as paying your own health insurance premiums, including medicare premiums, this can be a great money saver. Even medical commuting miles (19 cents a mile for 2011), tolls, and parking fees can be deducted! Even hotel stays can be deducted but only to a limit. Copayments for medical, dental, and vision procedures, hospital stays, prescription medicines, prescription glasses and contact lenses are all deductible.
But if you paid for these items with a flexible spending account (FSA) then they are not deductible.
Supplements and over-the-counter medicines for overall health and medical marijuana cannot be deducted. If you're running your own business, it may be better to deduct your health insurance premiums as a business expense as the 7.5% threshold does not apply, and you get to reduce your FICA tax.
The bad news is that your deduction may be subject to the alternative minimum tax. If this happens, the deduction is essentially not allowed on your federal income tax return (although it maybe allowed for your state income tax return). If you live in California, you're likely to be subject to alterntive minimum tax (AMT) if your income is over $225,000, but the AMT can strike at far lower or far higher income levels as well depending on your filing status, state tax withholding, and so on.
You can use the medical expenses worksheets below to help you track your medical expenses.
Use page 1 to track your mileage. The approach on this page asks for the roundtrip distance to a particular doctor and the number of such trips in the year. Don't forget about tolls and parking fees. Save receipts from the doctor or hospital for each each visit, which will be needed if the IRS asks for supporting documentation.
If you have a device in your car to let you pass the toll gate quickly (such as FasTrak in the Bay Area), the monthly statement from that device is itself a receipt. Otherwise obtain a receipt at the toll gate. If you put money into a parking meter there is no receipt; but you should just note the amount in your records.
Use page 2 to keep track of your insurance payments. Note that medicare part D premiums are deductible.
Use page 3 to keep track of line items. These includes prescription medicines and devices that were not reimbursed by FSA or any other entity. Sometimes, even meals eaten at the hospital qualify.
Official documentation:
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IRS Publication 502 (medical and dental expenses)