Paying for drug rehab can be a challenge. High costs for quality care prevent many people from seeking help for addiction. What many people don’t know is that drug rehab is tax-deductible in certain situations.
When Is Drug Rehab Tax-Deductible?
According to the Internal Revenue Service (IRS), inpatient drug rehab (treatment, meals, and lodging) is a tax-deductible medical expense. This applies whether the individual, their spouse, or their dependent attends a rehab program.
“Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease,” says the IRS. Since addiction is a disease, drug rehab falls within these limitations.
However, a person can only deduct the cost of rehab that exceeds 7.5 percent of their adjusted gross income (AGI).
If someone’s AGI is $40,000, any medical expenses over $3000 are tax-deductible. If they attend a treatment program that costs $10,000, they can deduct $7000 from their taxable income.
Though deductible health costs also include insurance premiums, they do not include the money paid by your insurance company for drug rehab. Only what you pay out-of-pocket counts as a qualifying medical expense.
For specific questions about whether the drug rehab is tax-deductible in your situation, check with a tax professional.
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What Is A Tax Deduction?
A tax deduction reduces the amount of income that someone has to pay taxes on. The individual in the example above would only have to pay taxes on $33,000, which would significantly reduce their tax burden.
When filing taxes, an individual can choose whether to claim the standard deduction or to itemize deductions. The standard deduction for 2019 was $12,200 for single people and $24,400 for married couples.
It makes sense for someone to itemize deductions if the result will be a higher amount than the standard deduction. In this case, if a rehab program costs $15,500 or more, the person could deduct $12,500 or more from their taxes, so it would be worth it for them to itemize.
Tax-Free Ways To Pay For Drug Rehab
There are several tax-free ways to pay for the 7.5 percent of drug rehab costs that aren’t tax-deductible.
A health savings account, flexible spending account, or health reimbursement arrangement may cover some of the costs for you or a dependent family member. A tax professional can help you determine if one of these options is right for you.
Using A Health Savings Account (HSA) For Drug Rehab
A health savings account (HSA) is a personal account for medical expenses. Each year, you can put a certain amount of money into it that will not be taxed.
For 2019, the maximum contribution amount was $3500 for an individual and $7000 for a family. This amount can come out of your paycheck pre-tax or you can put it in later and claim it as a tax deduction.
An HSA may be offered through your employer, and some employers put money into it. If you leave your job for any reason, your HSA stays with you.
You may also qualify for an HSA on your own if you meet certain requirements, such as not being on Medicare and having a high deductible health plan.
Using an HSA to pay for drug rehab makes sense if you already have money saved in it. But you don’t necessarily have to plan ahead. If you have money in the bank to cover health costs, you may be able to open an HSA and transfer the money before paying for rehab.
Using A Flexible Spending Account (FSA) For Drug Rehab
A flexible spending account (FSA) is offered by an employer and tied to them. If you leave your job, you lose your FSA. As long as you stay with them, your FSA will reimburse you for medical expenses like drug rehab.
Each year, a person and/or their employer can put $2650 in their FSA. If they are married, their spouse can do the same. Any reimbursement they receive counts as a tax deduction. At the end of the year, any remaining money is void.
An FSA requires a bit more planning, as it can only be opened in specific situations, such as when you are hired or during annual open enrollment.
Using A Health Reimbursement Arrangement (HRA) For Drug Rehab
A health reimbursement arrangement (HRA) is owned and funded by an employer. That means you don’t pay any money into it but can be reimbursed for health costs up to a certain amount. It also means that it comes and goes with your job.
Any money paid out for drug rehab through an HRA is tax-deductible. An added benefit is that they don’t require you to put money aside for treatment.
Choosing An Affordable Drug Rehab Program
If you’re struggling to pay for drug rehab or to find an affordable program, writing it off as a tax deduction can be a big help.
But cost shouldn’t be the only factor you consider when choosing addiction treatment.
If you select a program that is a poor fit to save money, the cost of relapse, addiction, and repeated rehab stays may add up to an even greater amount.
Drug rehab programs can vary greatly in their treatment types, lengths of stay, and quality of care. Some have more options than others. Finding the one that meets your needs is essential.
The best programs combine evidence-based therapies into an individualized treatment plan, ensuring your best chance at recovery success.
To learn more about Vertava Health rehab programs that may be tax-deductible, contact one of our treatment specialists today.