Medical Expense Deduction: The 7.5% AGI Floor Explained

The way this goes wrong is usually a hospital payment plan, and it does not feel like a mistake while it is happening.

Say a $2,310 sleep study was denied as not medically necessary, the appeal went nowhere, and the hospital agreed to take the money in three pieces: $770 in November, $770 in December, $770 on 2 January. One bill, three payments, two tax years. The first two landed in a year with enough other medical spending to matter. The third landed in a quiet year and will almost certainly be worth nothing at all. Moving that last payment four days earlier would have cost nothing.

So this page is not really about whether a denied bill is deductible — it usually is. It is about the three conditions that decide whether the deduction is worth anything, and which year it lands in.

One caveat, and it weighs more here than on the claims pages. I don't prepare returns, and nothing below is a reading of yours — it is a map of where these rules are written, so you can open them against your own facts. Treat the dollar figures with particular suspicion: they are reset every year by revenue procedure, and one of them changed in the middle of this one. Every figure here was read on 22 August 2026 and is quoted with the document it came from.

The statute never asks whether insurance covered it

Here is the operative sentence, and it really is one sentence (26 U.S.C. § 213(a)):

There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent … to the extent that such expenses exceed 7.5 percent of adjusted gross income.

Read what that does with your denial. "Not compensated for by insurance or otherwise" is not an obstacle you have to get around — it is the condition you are already in. The denial is the reason the expense qualifies. People arrive here assuming a refused claim is somehow tainted, when it is the reimbursed claim that gets disqualified.

What the statute does ask is whether the thing you bought was medical care, and that definition lives in § 213(d) and in Publication 502. It is not the test your plan ran. Your insurer measured the sleep study against its own clinical criteria and its own contract; the IRS asks whether the cost was for diagnosis, cure, mitigation, treatment, or prevention of disease. Those two tests disagree in both directions. A plan can refuse something the IRS plainly treats as medical care. The IRS can refuse something a plan would have paid — cosmetic surgery is the clean example, carved out by § 213(d)(9) unless the procedure addresses a deformity from a congenital abnormality, an accident or trauma, or a disfiguring disease. Digging out your insurer's criteria document is a separate job, covered in the criteria behind a 'not medically necessary' denial. It has no bearing at all on this question.

One caution that belongs here rather than in a footnote: a bill you were never legally obligated to pay does not become worth paying because it might be deductible. Settle whether you owe it first. The deduction is at most a fraction of the money back, and often it is nothing.

Two gates, and then the floor

The 7.5% figure gets quoted as though it were the only hurdle. It is the second of three.

Gate one is itemizing at all. The medical deduction lives on Schedule A, so it does nothing unless your total itemized deductions beat your standard deduction. For tax years beginning in 2026 those are $16,100 for single filers and married filing separately, $32,200 married filing jointly, and $24,150 head of household, plus $1,650 for age 65 or blindness — $2,050 if you are unmarried and not a surviving spouse (Rev. Proc. 2025-32, § 4.14).

Gate two is the floor, and on paper it is four lines. On the 2025 Schedule A, the current revision as of today: line 1 is your medical and dental expenses, line 2 pulls your AGI from Form 1040 line 11b, line 3 is line 2 multiplied by 0.075, and line 4 is the difference or zero, whichever is larger. The form carries its own warning directly above line 1 — "Do not include expenses reimbursed or paid by others."

Here is what that arithmetic does to two households with identical income.

The first column is the common one and its answer is a shrug. That $3,250 goes onto Schedule A, sits next to capped state taxes and whatever mortgage interest there is, and the total still loses to $16,100. The deduction was real and worth zero. The second column is a year with a hospital stay, or a denied surgery paid out of pocket, or a long illness, and there the floor is a speed bump rather than a wall.

Notice too that the floor is a percentage, not a fixed dollar amount. A year when your income drops is a year when the floor drops with it. A bad year for earnings arriving on top of a bad year for health is the scenario in which this deduction finally does something.

The clock runs on the payment date, not the service date

Publication 502 (2025) is unambiguous: you can include only the medical and dental expenses you paid this year, generally not payments for care you will receive in a future year. Three follow-on rules in the same paragraph settle most arguments about which year a bill belongs to:

• a check counts the day you mail or deliver it, not the day it clears;
• a pay-by-phone or online payment counts on the date the financial institution's statement shows the payment was made;
• a credit card charge counts in the year the charge is made, not the year you pay the card off.

That third rule is the useful one on a denied bill. Charging $2,310 on 28 December puts the whole amount in that year even though you spend the next eleven months repaying it. Useful is not the same as free: card interest over those eleven months can easily outrun whatever the deduction saves, and that is arithmetic to do before the charge rather than after.

What I could not find is an IRS sentence covering third-party medical financing — the promotional-rate lender a hospital hands you at the discharge desk, where the lender pays the provider and you repay the lender. The credit card rule is the obvious analogue and probably governs, but "probably" is doing real work in that sentence. That one goes to whoever signs your return, not to my page.

Two more timing notes. Pub. 502 interrupts itself mid-paragraph to say that none of this decides FSA reimbursement — "this is not the rule for determining whether an expense can be reimbursed by a flexible spending arrangement." That rule lives in Publication 969, which says a health FSA reimburses qualified medical expenses you incurred during the period of coverage. The deduction follows the year you paid, and the two can land in different years. And if you discover a deductible expense you missed in an earlier year, Pub. 502 sends you to Form 1040-X for that year rather than onto this year's Schedule A — generally within 3 years from filing the original return, or 2 years from when the tax was paid, whichever is later. Appeals that run eighteen months make that less theoretical than it sounds.

Winning the appeal later has a tax consequence

This is the part that catches people who did everything correctly.

You paid the denied bill in 2026 and deducted it. The external review came back in your favour in 2028, the insurer paid, the provider refunded you, and money you already deducted is back in your hands. Pub. 502 (2025), under What if You Receive Insurance Reimbursement in a Later Year?, says you must generally report that reimbursement as income, up to the amount you previously deducted.

The exception is the important half of the paragraph, and it is generous: don't report the amount of reimbursement you received up to the amount of your medical deductions that didn't reduce your tax for the earlier year. That is the tax benefit rule, written into 26 U.S.C. § 111(a) — gross income does not include a recovery of an amount deducted in a prior year "to the extent such amount did not reduce the amount of tax imposed by this chapter." Pub. 525 carries the mechanics under Recoveries.

Run that against the two columns above. The household that deducted $23,750 and later got $2,310 back reports the $2,310, because its deduction did cut its tax. The household whose $3,250 drowned in a standard-deduction year reports nothing, because that deduction never reduced anything. And the household that never deducted at all is covered by the next heading in the publication: if you didn't deduct the expense because you weren't over 7.5% or didn't itemize, the reimbursement is not income up to the amount of the expense.

Which means the document you will need in 2028 is the return you filed in 2026. Keep it where you can find it.

One dollar, one tax break

Everything in this section is a different way of accidentally claiming the same expense twice.

HSA. Pub. 502 (2025) is blunt — you can't include expenses you pay for with a tax-free distribution from your health savings account, and, in the sentence that closes the clever workaround, you also can't use other funds equal to the amount of the distribution and include the expenses. The denied bill is either an HSA reimbursement or a Schedule A entry. Never both. Since an HSA reimbursement has no deadline at all while the deduction is welded to the payment year, the choice is less symmetric than it looks; the reimbursement side is worked through in reimbursing yourself from an HSA after a denied claim.

FSA. Amounts for which you are fully reimbursed by a health FSA funded with pre-tax salary reductions are out. For 2026 the salary reduction limit is $3,400, with a maximum carryover of $680 (Rev. Proc. 2025-32, § 4.15).

HRA. Expenses reimbursed by a health reimbursement arrangement are out, in equally flat terms.

Anything an insurer, an employer, or a charity paid, including hospital financial assistance. If the hospital wrote off $4,000 of a $6,000 bill, your number is what you actually paid — which an itemized statement shows and a one-line "amount due" notice hides. The wording that gets you one is in requesting an itemized bill.

What is settled for 2026, and what is not

Worth separating out, because the internet is full of medical-deduction pages quoting a floor that stopped being the law years ago.

The 7.5% floor is permanent. The figure in § 213(a) read 7.5% from 1986 until the Affordable Care Act (Pub. L. 111-148, § 9013) raised it to 10% for tax years beginning after 2012 and bolted on a subsection (f) that held 7.5% open temporarily. Congress then rewrote that temporary subsection twice — Pub. L. 115-97 in 2017, Pub. L. 116-94 in 2019 — each time buying the lower floor another year or two. Pub. L. 116-260, § 101(a) ended the cycle: it substituted "7.5 percent" for "10 percent" in § 213(a) itself and struck subsection (f) out entirely. There is no sunset in the statute as it reads today, which is why a page still quoting 10% is quoting a rule that no longer exists.

The 2026 dollar figures are published, with a caveat printed on them. Rev. Proc. 2025-32 sets the 2026 inflation-adjusted amounts "for various Code provisions as in effect on October 9, 2025," and adds that to the extent amendments are enacted for 2025 or 2026 after that date, taxpayers should consult additional guidance to see whether the adjustments still apply. Read that as: final unless Congress moves.

Publication 502 itself has not caught up, and that is normal. The version on IRS.gov today reads "Publication 502 (2025) … For use in preparing 2025 Returns." The 2026 revision appears in the new year. Any dollar figure you copy out of it right now is a 2025 figure — the mileage rate included.

Medical mileage changed in the middle of this year. Driving to appointments is deductible medical transportation, and the standard rate for 2026 is 20.5 cents per mile from 1 January through 30 June (Notice 2026-10, 2026-4 I.R.B. 378), then 23.5 cents per mile for expenses paid or incurred on or after 1 July, under Announcement 2026-11 modifying that notice (Internal Revenue Bulletin 2026-29, 13 July 2026). Two rates in one year means your mileage log needs dates on it, not just a total.

A new haircut on itemized deductions starts this year, and it is almost certainly not aimed at you. 26 U.S.C. § 68, rewritten by Pub. L. 119-21 § 70111 for tax years beginning after 31 December 2025, cuts itemized deductions by 2/37 of the lesser of those deductions or the taxable income above the point where the 37% bracket starts — $640,600 for single filers, $768,700 joint, in 2026. Below that bracket it does nothing.

Your state may be far more generous than the federal rule. New Jersey, for one, allows a deduction from gross income for medical expenses over 2% of income, with no itemizing requirement at all, and applies its own version of the later-year reimbursement rule (NJ Division of Taxation, Deductions). A denied bill that vanishes on the federal return can still be worth something on a state one, so look up your own state before you write the whole thing off.

Three numbers to have before 31 December

None of this needs a professional to start. It needs three numbers, and December is the month in which they are still actionable.

One: 7.5% of your expected AGI for the year. Write it on the outside of the folder. That is the line every medical dollar has to cross before it counts for anything.

Two: what you have actually paid so far this year, across every provider. Not what you were billed — what left your account. Card statements and cancelled checks, because the payment date is the whole ballgame.

Three: the gap between your itemized total and your standard deduction. If those two numbers are close and a bill is sitting on your desk in late December, the payment date is the one variable still under your control. If they are nowhere near each other, you have just saved yourself an evening of adding up receipts, which is also a useful result.

Then one question for a preparer, if you use one: whether a bill still under appeal is better deducted now and unwound later under the tax benefit rule, or left alone for the HSA. Both sets of rules are linked above. The answer turns on your bracket, your account balance, and how likely the appeal is to win, which are facts I do not have and will not guess at. What I can say is that both roads stay open only for as long as the receipts and the payment dates survive.