Most people see a psychotherapist/counselor for the mental benefits of having someone to talk to about anxiety, depression, relationship issues or substance abuse. Insurance companies have increasingly become difficult to work with and will often dictate types of treatment, how many sessions are allowable, and sometimes deny coverage in the middle of treatment. They also dictate when someone is “well” enough to not need treatment. More and more students I work with at universities are paying out of pocket for mental health services because of the hassles of dealing with insurance. Same is true for parents with whom I consult for therapeutic placement. Private pay, while seemingly more expensive on the front-end, turns out to often be comparable to using insurance.

What many people don’t realize is that seeing a therapist or paying for residential treatment out of pocket can often be covered through out of network benefits and also might also provide tax deductions.

Read on to learn when and what could be deductible. This may get more complicated if you consider using a health savings plan or flexible spending account to pay for services but I’ll talk more about that later in the post here. Before delving into the specifics of deducting mental health expenses from taxes, it’s essential to understand the tax laws governing medical expense deductions. Here are some key points to consider:

• Qualifying Medical Expenses. The Internal Revenue Service (IRS) allows taxpayers to deduct certain medical expenses that exceed a certain threshold (adjusted gross income (AGI) threshold), typically 7.5% of their AGI. Qualifying medical expenses may include costs related to diagnosis, treatment, prevention, or mitigation of physical or mental illnesses.
• Mental Health Services. Mental health services that may qualify for tax deductions include therapy sessions, psychiatric care, medication management, inpatient treatment, and substance abuse treatment. However, expenses related to general health and wellness, such as gym memberships or nutritional supplements, are typically not deductible.
• Documentation. To claim deductions for mental health expenses, parents must maintain accurate records of all related expenses, including receipts, bills, and insurance statements. Documentation should clearly indicate the nature of the services provided, the date of service, and the amount paid.

That’s the short list of the key points but now let’s actually look at what is covered.

What are My Qualifying Expenses?

Only medical expenses that are for the “diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body” are considered qualifying expenses. Your son or daughter’s therapist appointments are deductible as a medical expense, according to IRS Publication 502, but only to the extent it is for medical care. You can also include the cost of therapist appointments for your spouse or your dependents, if applicable.

Below is a partial list directly from the IRS site (I took the liberty of highlighting some of the more relevant items):

• Acupuncture
• Air conditioner necessary for relief from allergies or other respiratory problems (less any increase in the value of your home resulting from installation of air conditioning)
• Alcoholism treatment, including inpatient treatment, meals and lodging at a therapeutic center for alcohol addiction
• Birth control pills prescribed by a doctor
• Braille books and magazines used by a visually-impaired person
• A clarinet and lessons to treat the improper alignment of a child’s upper and lower teeth
• Contact lenses, including equipment and materials for using contacts
• Cosmetic surgery, if it’s necessary to improve a deformity related to a congenital abnormality, accident or disease
• Special foods. When prescribed by a doctor, you can deduct the extra cost of purchasing special food to alleviate a specific medical condition
• Doctor or physician expenses
• Drug addiction treatment, including in-patient treatment, meals and lodging at a therapeutic center for drug addiction
• Exercise program if a doctor has recommended it as treatment for a specific condition
• Extra rent or utilities for a larger apartment required in order to provide space for a nurse/attendant
• Eye surgery, such as Lasik or a similar procedure, when it is not for cosmetic purposes only
• Guide dog or other animal used by a visually-impaired, hearing-impaired or otherwise physically disabled person
• Hospital care
• Laboratory fees
• Legal fees paid to authorize treatment for mental illness
• Lifetime care advance payments
• Lodging expenses while away from home to receive medical care in a hospital or medical facility
• Long-term care insurance and long-term care expenses (there are limitations to what you can deduct)
• Mattresses and boards bought specifically to alleviate an arthritic condition
• Medical conference admission costs and travel expenses for a chronically ill person or a parent of a chronically ill child to learn about new medical treatments. (But not the cost of meals and lodging while attending the conference)
• Medicine
• Nursing care
• Nursing home expenses, including the entire cost of medical care, plus meals and lodging if the main reason for being in the home is to obtain medical care
• Oxygen and oxygen equipment
• Special education; tuition for sending a mentally impaired or physically disabled person to a special school that has resources to relieve the disability
• Smoking cessation programs (does not have to be recommended by a physician)
• Swimming (the cost of therapeutic swimming prescribed by a physician)
• Telephone (the cost and repair of special telephone equipment for a hearing-impaired person)
• Television (the cost of equipment used to display the audio part of a TV program for hearing-impaired persons)
• Transportation costs for obtaining medical care
• Travel expenses for parents visiting their child in a special school for children with drug problems, where the visits are part of the medical treatment
• Weight loss program, if it is recommended by a doctor to treat a specific medical condition or to cure any specific ailment or disease
• Whirlpool baths prescribed by a doctor
• Wig for the mental health of a patient who has lost his or her hair due to a disease
• X-ray services

Please ask your tax professional how to also list expenses related to placement and working with therapeutic boarding school, education consultant, therapeutic transportation services, case manager, residential treatment center and inpatient hospitalization for any of your children that you listed as dependents and needed such care. 

*One important thing to remember is that the criteria for getting insurance to cover the cost of treatment is not the same as meeting criteria for qualified expenses even though they are often the same dang thing. Insurance is primarily focused on whether a treatment or service is ‘evidence-based’ or a generally accepted practice. The IRS is focused on specific items on a list they believe are relevant for mental health care.

What Counts as Therapy (…Not Everything)?

The therapist’s treatment must be related to treating a physical or mental issue. For example, the IRS ruled that marital counseling to improve the marital relationship was not deductible as a medical expense since it was not related to a mental or physical defect (…which is why you should work with your therapist during the intake session to determine if you really need “marriage counseling” or individual counseling where you occasionally bring in your spouse to help with your distress). 

However, in other rulings, the IRS has held that the cost of psychiatric treatment for sexual inadequacy and incompatibility was closely related enough to a medical or physical defect that those costs could be deducted. This gray area comes up often which is why you should consult your tax professional AND therapist. Other types of therapy or intervention often overlooked include:

• Individual and Group Counseling provided at Therapeutic Boarding School, Hospital or Residential Treatment Center
• Intake Sessions
• Psychiatrist visits/consults
• Psychological testing
• Therapeutic transportation service
• Case manager or education consultant
• Parenting assessment
• Drug testing

Medical Deduction Limitations

Just because a therapist’s appointment qualifies as a medical expense doesn’t mean you will actually be able get credit for it on your tax return. In 2012, you could only deduct medical expenses that exceed 7.5 % of your adjusted gross income. For future years, the floor goes up to 10 %. For example, if your AGI is $51,000, using the 10 percent floor, you’re only able to deduct your medical costs that exceed $5,100. Unless you’ve got a very expensive therapist, you’re probably going to need some other medical expenses to be able to take any deduction.

If psychiatric hospitalization, residential treatment, or therapeutic boarding school have been recommended, these are big ticket items that require coordination with the insurance company. If insurance is unlikely to cover a significant portion, it’s important to talk with your CPA to understand how to fund these essential services (that are also qualified expenses) so as to maximize the deductible amounts. 

Who Doesn’t Love a Good Strategy?

Let’s explore strategies for maximizing tax benefits for mental health services:

• Timing. If going to a therapist for counseling or working with a psychiatrist for medication management can be held off till the start of the next calendar year, there may be some tax or cash flow benefits. Assuming that your son or daughter is stable and not a harm to themselves or others, talk with your CPA and the mental health providers to determine if there is a strategic advantage scheduling sessions and appointments at different times of the year. 
• Itemize Deductions. To claim deductions for medical expenses, taxpayers must itemize their deductions on Schedule A of Form 1040. Compare the total of your itemized deductions to the standard deduction to determine which option provides the greatest tax benefit. If you can only deduct a few hundred dollars or so after accounting for the AGI floor, you might not benefit if you give up your standard deduction to itemize. However, if you were already planning to itemize because of other itemized deductions, such as the mortgage interest deduction or charitable contributions, any medical expenses can also be deducted without further cost.
• Bundle Expenses. Consider bundling mental health expenses with other qualifying medical expenses to meet the AGI threshold for deductibility. This may include expenses for dental care, vision care, prescription medications, and other medical services.
• Health Savings Account (HSA) or Flexible Spending Account (FSA). If you have a health savings account (HSA) or flexible spending account (FSA), use funds from these accounts to pay for mental health services. Contributions to HSAs and FSAs are made on a pre-tax basis, providing immediate tax savings. HSA contributions carry forward to the next year while FSA contributions do not. 
• Tax Credits. In addition to deductions for medical expenses, parents may be eligible for certain tax credits related to mental health expenses. For example, the Child and Dependent Care Credit may provide tax relief for expenses related to child care services, including those that support a child’s mental health needs.
• Consult a Tax Professional. As always, tax laws and regulations can be complex, and eligibility for deductions may vary depending on individual circumstances. Consult a qualified tax professional or accountant for personalized guidance on maximizing tax benefits for mental health services. Be specific and be prepared with all of the services, provider information, and invoices you’ve collected over the last tax year. 
• 529 Plan for Special Needs-Related Expenses? Updated tax laws make it easier for parents to use money saved in a 529 plan for special needs-related expenses, instead of educational expenses exclusively. Before the laws passed, parents could have faced tax penalties for withdrawing money from the 529 plan and spending it on something besides educational expenses. Now, you can roll over money from the 529 plan into an ABLE account (a kind of savings account for people with special needs). Criteria for ABLE-eligibility is specific and strict but not impossible to obtain. Once the money is in the ABLE account, you can use it to pay for special needs-related expenses. The rollover amount does count towards the ABLE account’s $15,000 total yearly contribution limit. Before making a rollover, you should consider how much money has been contributed to the ABLE account this year already. Please keep in mind that money saved in 529 plans is protected from Medicaid payback. The government will not be able to get repayment of Medicaid costs from a 529 plan that benefits a person with special needs who passes away. In contrast, the government can request payback from an ABLE account. Any money that you move from a 529 plan to an ABLE account is now at risk of being taken by the government if your child passes away. It may make sense to move only the money you need now to the ABLE account, without cleaning out the 529 plan entirely.

As parents, prioritizing our children’s mental health is paramount. By understanding the tax laws governing medical expense deductions and implementing strategies to maximize tax benefits, parents can alleviate financial burdens while ensuring their children receive the mental health care they need. Remember to maintain accurate records of all mental health expenses and consult a tax professional for personalized advice. Together, we can prioritize our children’s mental well-being while maximizing tax benefits for our families.

Please note that this blog post is intended for informational purposes only and should not be construed as tax advice. Tax laws and regulations are subject to change, and individual circumstances may vary. Don’t rely on this blog post for tax decisions. Consult your tax professional. Seriously…I’m a therapist giving you info on taxes! This is a starting point to formulate some questions for the number crunchers helping you.