Eligible medical expenses which may be included among itemized deductions are the costs of equipment, supplies, and diagnostic devices, as well as payments for legal medical services performed by licensed medical practitioners. Medically prescribed drugs are included among necessary medical supplies. In general, if it is not prescribed, it is not considered a necessary drug. Thus, in most cases, you cannot deduct over-the-counter medicine among itemized deductions.
Part of the confusion is because until recently, a medical flexible spending account (FSA), which is a dedicated pretax account, could be used to pay for over-the-counter drugs. This ended at the beginning of 2011, when the Patient Protection and Affordable Care Act changed the rules.
As of January 1, 2011, the FSA may still be used to pay for all eligible medical expenses. However, these medical expenses can’t then be claimed as deductions. You can’t get a double tax benefit on eligible medical expenses.
Over-the-counter medications can be eligible deductions if they have been prescribed by a doctor. Specifically, a prescription must have been given to the pharmacist, an Rx number must have been assigned, the pharmacy must have a record of that Rx number, and the date, cost, and name of the person to whom that prescription applies must also be recorded.
For example, over-the-counter anti-nausea medications are commonly prescribed for patients fighting cancer, in addition to the anti-cancer prescription drugs. As long as the anti-nausea medications are properly prescribed, they may be deducted. It is not enough for the doctor to recommend them in addition to the anti-cancer regimen.
Other typical examples where over-the-counter medicine could be prescribed by a doctor are eye drops for use with prescription contact lenses and special vitamins for pregnancy and some medical conditions. Flu shots which are available on a walk-up basis at the local pharmacy are not deductible.
Insulin is the only exception to the rule. Insulin is always deductible, even if it is purchased over-the-shelf without a prescription.
You can only deduct the portion of eligible medical expenses that is greater than 7.5% of your adjusted gross income (AGI). Eligible medical expenses which do not exceed this threshold are not eligible.
This is in contrast to eligible medical expenses which are purchased through a medical FSA, where every dollar is eligible for the tax-free reimbursement. However, funds in a medical FSA which are not used by the end of the year are lost to the employer.
Prescribed over-the-counter drugs may also be deducted for a spouse, qualifying child, or qualifying relative. Even if a couple files separately, one member of the couple may choose to pay all medical expenses for the family, in order to increase the total amount of eligible medical expenses greater than 7.5% of AGI.