Diagnosed with substance use disorder and sent for drug rehab for treatment? It's common to ask if the expenses will be tax deductible.

Well, yes they are. Drug treatment services like medication-assisted treatment (MAT) and cognitive behavioral therapy (CBT) might qualify as tax deductions.

However, they need to exceed a certain percentage of your annual income to be deductible.

Let's see how to make drug rehab expenses tax deductible, reducing your tax bill!

Tax Deduction: What's It And How It Works?

A tax deduction cuts down the amount you owe in taxes. It's like a discount from the government for spending on important stuff, like medical expenses.

It's a way of getting a tax break for spending money on things the government sees as important.

Here's how it works: Let's say you earn $50,000 a year but spend $8,000 on rehab. With a tax deduction, you can subtract that $8,000 from your income.

So, instead of being taxed on $50,000, you're only taxed on $42,000. This means you owe less in taxes, saving you money.

Tax deductions can really add up, especially if you have other qualifying expenses or dependents.

So, by deducting rehab costs, you not only get the treatment you need but also save some money on taxes, which can make a big difference in your finances.

What Are The Benefits Of Tax Deduction?

A tax deduction is kind of like a bonus from the Internal Revenue Service (IRS) for spending money on important stuff like health care or rehab.

The benefits of tax deductions are:

• Save money: This is the biggest advantage. Lower taxable income means a lower tax bill, leaving more money in your pocket.

• More financial freedom: With tax savings, you can allocate that extra cash towards important goals like building an emergency fund, paying off debt, or saving for retirement.

• Makes healthcare more accessible: If you allow deductions for rehab, the tax system will incentivize necessary treatments, making them more affordable.

• Smarter financial planning: Understanding tax deductions empowers you to make informed financial decisions and plan for healthcare expenses more effectively.

• Supports your recovery journey: Deducting rehab costs acknowledges the positive step you're taking towards a healthier life. It can also ease the financial burden associated with treatment.

Keep in mind: Claiming deductions has some rules. Usually, you have to itemize your deductions on your tax return, not just take the standard deduction.

Also, the medical expenses you deduct must be more than a certain part of your Adjusted Gross Income (AGI).

Are Drug Rehab Expenses Tax Deductible - Answered

Drug and alcohol rehab is considered a medical expense. That's why it is tax deductible. But it is possible under certain conditions.

Here are the conditions:

• Your medical and dental costs need to be more than 7.5% of your yearly AGI.

• You have to itemize your deductions using a Schedule A form on your taxes.

For instance, if your yearly adjusted gross income is $30,000, you can deduct medical expenses over $2,250. So, if rehab costs you $7,500, you can deduct $5,250 of that cost on your taxes.

Qualifying Medical Expenses For Tax Deduction

You can deduct various medical expenses from your taxes, not just the treatment itself. This includes things like meals and lodging during treatment, prescriptions, and transportation costs to and from treatment, like Uber rides or plane tickets.

Additionally, other medical services related to your treatment, such as hospital visits, blood work, diagnostic imaging, and drug tests, can also be deducted. Just make sure to keep all your receipts for these expenses!

Here's a rundown of 10 common rehab-related expenses you might be able to deduct from your taxes, but there are some rules to follow.

If these services are already included in your treatment package, you can't claim them separately.

Common examples include:

• Offsite detox

• Pain management or specialized services

• Dental, vision, and physical exams

• Neurological tests such as sleep studies

• Physical therapy

• Prescription refills from the pharmacy

• MRIs and CT scans

• Psychiatric or psychological consultations

• Legal fees for treatment authorization

• Smoking cessation programs

However, not all expenses qualify for a tax deduction. For example, money spent on substances like marijuana, cocaine, or heroin during your addiction cannot be deducted.

Here are some items that you can't deduct while in drug rehab:

• Childcare expenses

• Nonprescription drugs and supplements

• Toiletries

• Insurance premiums

• Future medical expenses for services provided after the fiscal year

• Health Savings Accounts (HSA)

• Flexible Spending Arrangements (FSA)

• Medical Savings Accounts (MSA)

• Gym memberships

• Cosmetic surgery

If you're still unsure about what medical expenses you can deduct, we recommend checking the IRS guidelines for clarification.

Step-By-Step Guide To Claim Drug Rehab On Your Taxes

Claiming rehab on your taxes involves showing the IRS that you paid for qualified medical expenses and reduces your taxable income. Here's a breakdown of the process:

1. Understand Your Eligibility

The first step is to determine if your drug rehab expenses qualify as deductible medical expenses. Here's what you need to know:

Medical Treatment:

The IRS considers drug rehabilitation a form of medical treatment for addiction, a recognized medical condition. This means the costs associated with qualified rehab programs are generally deductible.

Unreimbursed Expenses:

You can only deduct out-of-pocket expenses for rehab. Any portion covered by insurance or other programs won't be deductible. Keep detailed records of any reimbursements you receive throughout the treatment process.

2. Itemize Deductions

The standard deduction offered by the IRS is a simplified way to reduce your taxable income. However, to claim rehab costs, you must itemize deductions.

This means listing all your qualifying deductions on Schedule A (Form 1040) instead of taking the standard deduction.

3. Meet the AGI Threshold

There's a hurdle to overcome before you can deduct your rehab costs. The IRS allows you to deduct only medical expenses that exceed 7.5% of your Adjusted Gross Income (AGI).

Your AGI is your total income minus certain above-the-line deductions like student loan interest and retirement plan contributions.

Here's an example: Imagine your AGI is $60,000. In this case, you can only deduct medical expenses that are above $4,500 (7.5% of $60,000).

If your total medical expenses, including rehab costs, amount to $7,000, you can only deduct the portion exceeding $4,500, which is $2,500.

4. Keep Records & Documentation

The burden of proof lies with you, so meticulous record-keeping is crucial. Gather and maintain detailed documentation of all your rehab-related expenses throughout the year. This includes:

Receipts:

Keep receipts for all rehab program fees, medication costs, copays, and deductibles paid out of pocket.

Invoices:

Obtain invoices from treatment facilities or providers that detail the services rendered and associated costs.

Explanation of Benefits (EOBs):

These documents from your insurance company will show the amount they covered and the portion you were responsible for.

5. Claim Your Deduction

Once you've gathered all your documentation and confirmed you meet the eligibility criteria, it's time to claim your deduction. Here's what to do:

List Itemize Deductions:

On your tax return, choose the option to itemize deductions. Locate Schedule A, the form dedicated to listing itemized deductions.

Under the section for "Medical and Dental Expenses," you'll find a line for "Medical expenses you paid this year."

Enter Your Total:

On this line, enter the total amount you paid out-of-pocket for all your qualified medical expenses, including your drug rehab costs.

Calculate Your Deduction:

Remember the 7.5% AGI threshold? Subtract 7.5% of your AGI from the total medical expenses you entered on Schedule A. The resulting amount is your deductible medical expense.

Transfer to Form 1040:

Transfer the deductible medical expense amount from Schedule A to the appropriate line on your Form 1040 to reduce your taxable income.

Additional Tips:

Remember, tax rules can get complex, so it's wise to seek advice from a tax advisor. They can help ensure you're following the rules correctly and getting the most out of your deductions.

This is particularly important if you have significant medical expenses or high rehab costs. You can find helpful resources on medical deductions on the IRS website.

FAQs

Can I deduct rehab expenses for a dependent?

Yes, you can deduct rehab costs for a dependent if you claim them on your tax return and you cover their medical expenses. You have to meet the same rules and thresholds as mentioned earlier for their rehab costs to qualify.

What if my insurance covers part of the rehab cost?

Unfortunately, you can only deduct the part of the rehab you paid for out-of-pocket. Any amount covered by insurance won't be deductible. Keep track of any reimbursements you get during treatment, as they lower your qualifying out-of-pocket costs.

How often can I claim tax deduction?

You can claim the deduction for drug rehab costs every year if you meet the eligibility and itemize deductions. There's no limit on how many times you can claim it. Just remember, you can only deduct the amount exceeding 7.5% of your AGI each year.

Do all rehab programs qualify for a deduction?

Usually, rehab programs treating addiction are considered medical expenses by the IRS. But to be sure, the program should be overseen by qualified medical pros and focus on treating addiction. If you're unsure, consult with a tax pro for clarification.

What documentation do I need to keep for claiming the deduction?

You need to keep:

• Receipts for all rehab fees, medication costs, copays, deductibles, and other out-of-pocket expenses.

• Invoices from treatment providers showing services and costs.

• Explanation of Benefits (EOBs) from your insurance company showing coverage details.

What if I lose my receipts or documentation?

If you lose your receipts or documents, you can recreate them in some cases. You can use bank statements, canceled checks, or credit card statements that show payments to rehab facilities. However, it's best to keep the original receipts and invoices.

Is there a deadline to file for this deduction?

The deadline to claim your deduction depends on when you usually file. Typically, it's April 15th of the following year, but you can get extensions if needed.

Final Words

Taking steps towards overcoming addiction through drug rehabilitation is a courageous decision with long-term benefits for your health and well-being.

Luckily, the IRS lets you lower your taxes by claiming rehab costs as medical deductions. Follow IRS rules by itemizing expenses and calculating the allowable amount to claim your deductions.

Use Schedule A when filing taxes, and consider consulting a tax professional for assistance. Don't overlook deductible expenses like lodging, prescriptions, and meals related to treatment.

Keep receipts for hospital visits, tests, and other medical expenses. Additionally, childcare, toiletries, gym memberships, and future medical costs are potential deductions to consider.