Paying for Hearing Aids: Tax Breaks from Uncle Sam
Health Savings Accounts and Flexible Spending Arrangements
30 August 2019
Hearing aids can be expensive. Not only do hearing aids typically cost thousands of dollars, but many health insurance plans, including Medicare, do not provide any coverage for hearing aids at all. Many people forego hearing aids because of the high cost and the unfortunate lack of insurance coverage. Yet, when left untreated, hearing loss can lead to social isolation and a diminished quality of life.
Using the standard medical expense deduction
Fortunately, the Federal Government—through the Internal Revenue Service (IRS)—does recognize hearing aids as a deductible medical expense. Specifically, according to IRS Publication 502 (Medical and Dental Expenses), “the cost of a hearing aid and batteries, repairs, and maintenance needed to operate it” all count toward your medical expense deduction. In other words, the IRS has stated explicitly that qualified, deductible medical expenses include not just the cost of hearing aids but also the cost of hearing aid batteries and hearing aid repairs.
Unfortunately, there is a catch. Specifically, on your federal income tax return for 2019, you can only deduct the portion of your medical and dental expenses that exceed 10% of your adjusted gross income (AGI). In other words, if your total medical and dental expenses for the tax year fall below your 10% deduction threshold, none of your health expenses are deductible, no matter how much you spent on hearing aids.
Granted, there are some basic strategies to increase your odds of exceeding the threshold and being able to claim a deduction for health expenses. You can reduce your gross income, perhaps by contributing to a retirement account; conversely, you can increase your qualified health expenses, perhaps by scheduling needed surgery or other medical procedures within the same calendar year that you buy hearing aids.
Even so, claiming a deduction for medical and dental expenses is made even more difficult by the new tax law. The Tax Cuts and Jobs Act has substantially increased the 2019 standard deduction to $12,200 for single filers and $24,400 for married filing jointly. Rather than trying to claim health expenses and other itemized deductions on your Federal income tax return, there is a fair chance that you may be better off just taking the standard deduction.
How to deduct the entire cost of your hearing aids
So rather than worrying about AGI thresholds and standard deduction values, wouldn’t it be nice if you could simply deduct the entire cost of hearing aids? You do have a few options in that regard. Depending on your situation, you may be able to pay for hearing aids using a Health Savings Account (HSA) or a Flexible Spending Arrangement (FSA).
With both the HSA and FSA, there is no deduction threshold. All the cash contributed to the HSA or FSA reduces your taxable income (i.e., is considered pre-tax dollars). HSA or FSA funds can then be used to pay for qualified medical expenses such as hearing aids and hearing aid batteries. Be warned, though. If you take distributions from your HSA or FSA for anything other than qualified health expenses, you may be subject to tax penalties.
Eligibility requirements for Health Savings Accounts
In order to contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP). To qualify for an HSA in 2019, the annual deductible on your health insurance plan must be at least $1,350 for individual coverage and $2,700 for family coverage. The trade-off for the higher deductible is that you are then allowed to take advantage of the tax deduction from HSA contributions.
However, just because a health insurance plan has a high deductible does not necessarily mean that it is eligible for an HSA. For example, an individual plan with a deductible of over $2,000, but with only a tiny co-pay for prescriptions, may not be HSA-permissible.
Furthermore, the high deductible requirements apply only to general health insurance, so you can have other, specific coverage and still qualify for an HSA. Within IRS Publication 969 (Health Savings Accounts) is a list of other health coverage that is permitted with an HSA, including workers’ compensation and dental care. In other words, the eligibility rules can be confusing. So if you want to contribute to an HSA, be careful to verify that your health insurance plan qualifies.
It’s also important to know that, while contributions to an HSA count as a deduction on your federal income tax return, the HSA contributions may not necessarily count as a deduction on your state income tax return. It depends on where you live. For 2019, California and New Jersey are the only two states that do not allow a state income tax deduction for HSA contributions.
Limits on annual contributions
There is also a limit on how much you can contribute to an HSA each year. For 2019, the maximum HSA contribution is $3,500 for individual (self-only) coverage and $7,000 for family coverage. If you are over fifty-five years old, you may also be eligible for additional “catch-up” contributions to the HSA, up to $1,000 a year.
While the HSA allows some flexibility in when you contribute to the account, the FSA requires a committed schedule of contributions. When you sign up for an FSA plan, you must then decide how much to contribute, generally from each paycheck. As with the HSA, there is also a limit as to how much you can contribute to an FSA over the course of a year. For 2019, the maximum annual FSA contribution is $2,700.
Differences between HSA and FSA plans
You can only withdraw funds from the HSA that you have previously contributed. On the other hand, once you designate a specific total contribution to your FSA, all the money you signed up to contribute for the year is available to you right away. For example, if you sign up to contribute $200 dollars a month to your FSA, you do not have to wait until five months have gone by before withdrawing $1,000. Rather, the entire sum of $2,400 is available to you at the beginning of the year.
A further difference is that while funds in the HSA can roll over and grow from year to year, the FSA is generally a “use-it-or-lose-it” plan. The savings in an FSA expire at the end of the plan year (or shortly thereafter) and cannot be rolled over entirely from year to year. Depending on the FSA plan offered by your employer, though, not all the unused balance may have to be forfeited at the end of the year. Specifically, the FSA plan can allow for either a carryover or a grace period.
Grace periods and carryovers
With a carryover, up to $500 of unused FSA funds from the previous plan year can be carried over and used to pay for qualified medical expenses in the following plan year.
With a grace period, any unused FSA funds from the previous plan year can be used to pay for qualified medical expenses incurred during a period up to two and a half months after the end of that year. After the grace period, any remaining FSA funds from the previous year expire completely.*
Moreover, if your employer FSA plan includes a grace period, you may be able to pay for hearing aids by drawing from two years of FSA contributions.
Supposed that, assuming your FSA plan has a two-month grace period:
- Your FSA plan year ends in December after you signed up to contribute $2,400 to your FSA for the year.
- However, you have only withdrawn $400 in health expenses and have $2,000 left in your FSA at the end of the year.
- In the following year, you again designate a total FSA contribution of $2,400 at $200 a month.
- In mid-January, you make an appointment with your audiologist to obtain a new audiogram and order two new hearing aids for $4,400.
- Even though you may have only contributed $200 to the FSA for the year so far, you can immediately withdraw up to the full $2,400 annual contribution amount.
- Moreover, since you are still within the grace period, you can also draw on the $2,000 balance remaining in your FSA from last year.
Therefore, thanks to some careful planning, you are able to use a total of $4,400 of pre-tax money to cover the entire cost of your hearing aids.
Eventually, there may come a day when Medicare and most other health insurance plans provide extensive coverage for hearing aids. Until that happens though, you can continue easing the high cost of hearing aids by taking advantage of medical expense deductions, Health Savings Accounts, or Flexible Spending Arrangements.
* There may be an exception to this rule for a Qualified Reservist Distribution (QRD) made from an FSA for individuals ordered or called to active duty.