At first glance, residential rehab appears costly. Some rehab centers don’t accept private insurance, forcing recovering addicts to pay out-of-pocket for expenses that can add up to tens of thousands of dollars per month. In other cases, an addicted person with health insurance may find he only has coverage for a 30-day stay, which is not always long enough.
Tax Deductible Rehab Services
On the bright side, fees charged by residential therapy centers are often tax-deductible as a medical expense. If you have paid drug or alcohol rehabilitation expenses for yourself, your spouse or your dependent, these expenses are most likely tax deductible. How much you can deduct on your taxes depends on a variety of factors, the most important of which is income. To qualify, your out-of-pocket expenses must exceed a certain percentage of your income.
Although your tax professional is best qualified to determine whether or not your rehab expenses are tax deductible, don’t let your tax situation be the deciding factor in your decision to get help. If you need drug rehab and you’re wondering if it is tax deductible, the time to learn more is now.
Can Rehab Be Tax Deductible?
Treatment for drug and alcohol addiction can be tax deductible if it meets the IRS requirements. Please consult with your accountant or a tax expert to make sure you personally qualify for these deductions and that you submit all the required information to the IRS correctly.
According to the IRS, if you and/or your spouse are under age 65, you can use Schedule A to itemize a list of medical and dental expenses for the tax year if they exceed 10 percent of your adjusted gross income. For example, if your adjusted gross income is $50,000 per year that means your itemized deductions must reach a threshold of $5,000 before you can list them as exemptions.
Most people have neither the discipline nor the patience to save every single receipt for medical expenses. It’s easy to total major expenses such as hospital admissions and therapy sessions, but saving receipts for minor expenses can be tedious. That’s why most people do not take advantage of the medical expenses tax deduction.
Is Inpatient Rehab Tax Deductible?
Inpatient drug rehab typically includes fees for room, board and other expenses. Both drug and alcohol addiction treatment are tax deductible. IRS Publication 502 includes a detailed list of the types of medical expenses you can deduct. These expenses, as they pertain to alcohol and drug addiction rehab, include:
- Payments of fees to doctors, psychiatrists, psychologists and nontraditional medical practitioners.
- Payments for acupuncture treatments or inpatient treatment at a center for alcohol or drug addiction, for participation in a smoking-cessation program and for drugs to alleviate nicotine withdrawal that require a prescription.
- Payments for transportation primarily for and essential to medical care that qualify as medical expenses, such as payments of the actual fare for a taxi, bus, train, ambulance or for medical transportation by personal car; the amount of your actual out-of-pocket expenses such as for gas and oil; or the amount of the standard mileage rate for medical expenses, plus the cost of tolls and parking fees.
If you have medical insurance that covers the cost of inpatient rehab, the amount covered by insurance must be deducted from your itemized expenses. You can only claim the resulting amount if it exceeds the 10 percent threshold.
Let’s take a look at an imaginary scenario to understand how this might work:
Barbara is struggling with alcohol addiction. After her husband Gary calls an intervention, she agrees to enter 30-day inpatient treatment. Barbara chooses a rehab center. There is a space available for her, so her husband drives her to the center, a 60-mile trip that includes one bridge toll.
At the rehab center, the admissions office informs Barbara and Gary that their insurance will only cover 10 days of inpatient treatment. They recommend that Barbara remain for the full 30 days. Her first 10 days of treatment are fully covered by insurance. The remaining 20 days will be paid for out of pocket from the family’s savings.
Barbara successfully completes her 30-day treatment. After her release from the rehab center, she continues to attend 12-step support meetings and private therapy sessions twice a week with a licensed psychologist who specializes in drug and alcohol addiction and recovery.
When it comes time to sit down and do their annual income tax return, Barbara and Gary realize that the non-covered portion of her treatment plan exceeds their combined adjusted gross income of $75,000. Therefore, they can itemize the costs of the prorated 20 days out of 30 at the rehab center.
They can also deduct the costs of her twice-weekly counseling sessions. Since they have been paying completely out of pocket for each session, at a cost of $90 per session or $180 per week, Barbara and Gary can include these sessions on their Schedule A.
Gary can also include on his list of itemized deductions the cost of transportation, including the toll fees, to drive Barbara to the rehab center, provided he has saved all of his receipts.
Is Outpatient Rehab Tax Deductible?
Outpatient rehab services may be partially deductible on Schedule A’s list of itemized medical deductions, provided they are listed among the items on IRS Publication 502 in the inpatient section.
Since outpatient rehab centers vary widely in their approach to treatment, individuals must check the list of deductions on Publication 502 very carefully to ensure compliance with tax law. The cost of the overall service, for example, most likely cannot be included on the list of itemized deductions because it does not include admission, room and board. Counseling services, if offered by a physician, psychiatrist or psychologist, may be tax deductible.
If your health insurance covers the cost of outpatient treatment, it’s unlikely that your costs will exceed the insurance premiums paid, although that depends greatly on the insurance plan under which you’re covered. Remember that you can only itemize expenses that exceed what your insurance plan covers; you can’t double dip and count the costs covered by insurance and what you’re paying out of pocket. The IRS only allows you to itemize medical deductions that you are paying out of pocket.
There are several other considerations when you’re trying to answer the question “Is rehab tax deductible?”
Are you self-employed
Self-employed individuals already qualify for one tax exemption on Form IRS 1040. Self-employed people who show a net profit for the year qualify for a self-employed health insurance deduction. This is reflected as an adjustment to your gross income rather than added to an itemized deduction list. Medical insurance premiums and long-term care premiums can be included in this deduction
You may need to weigh the financial implications, benefits and drawbacks of obtaining medical insurance that covers rehab, and the resulting reduction to your adjusted gross income, versus paying out of pocket and using the itemized deductions to offset the cost of rehab.
You can only include expenses paid during the current tax year.
If your rehab time spans two calendar years, you may end up without enough to include on your itemized deduction list to make it worthwhile. For example, if you enter a 30-day inpatient treatment program on Dec. 29, your program will end on Jan. 29. That spans two tax years. The portion from Dec. 29-31 can only be included on that year’s list of itemized deductions, not the full amount of the time spend in rehab.
You may want to enter rehab early enough to ensure it’s completed in one tax year or wait a few days to push it into the following year. Early is probably better – the faster you get treatment, the faster you can recover.
Drugs such as methadone or other medications to reduce alcohol and drug cravings can be tax deductible.
If using methadone or other medications to offset detox symptoms is part of your recovery, even outpatient recovery, these medications can be included on a list of itemized deductions. Only prescription medications can be included, however.
Are your dependents really considered dependents?
If you paid rehab expenses for someone who is not a dependent, you cannot deduct the cost of rehab on your own tax return. Dependents are typically but not always children — as a parent, you pay for most if not all of their expenses. A dependent may also be someone who lives with you for more than half the year, and for whom you pay most of the expenses.
You must also plan to itemize your expenses on your tax return. If you normally file the 1040EZ form, you skip itemizing because you take what’s known as the standard deduction. The 1040, on the other hand, allows you to deduct more than the standard allowable deduction. This generates tax savings. Items such as rehab expenses, property taxes and mortgage interest are all itemized expenses.
Geographic cures don’t count.
Trips to improve your health or get away from the drug or bar scene can’t be included in your itemized deductions. Although it’s tempting to think that just by traveling away from the local drug scene you’ll kick the habit, it’s unlikely. Only travel to and from a legitimate rehab center or hospital for treatment counts as something you can list on your itemized deductions.
Other Ways to Offset the Cost of Rehab
- Call your health insurance company and ask them to go over your policy with you, especially the section covering alcohol and drug abuse treatment. Insurance policies can be difficult for the lay person to understand. Don’t be ashamed to ask for help understanding your benefits. You can’t use what you don’t know you have, and many policies offer some type of coverage, even if it’s small.
- Save receipts for everything in preparation for tax season. “Can rehab be tax deductible?” is a question only answered when you actually sit down to do your taxes. During the year, as you pay for various expenses related to the cost of treatment, you might not know yet whether or not you meet the deduction threshold. Hang onto all of your receipts. Keep a box or basket in your bedroom or kitchen just for your receipts and save everything. They might come in handy at tax time.
- Ask rehab centers about sliding scale fees. You may qualify for what is known as a sliding scale fee. Sliding scale means that the stated cost of treatment can be reduced if you meet certain economic parameters. Each center sets their own policies for sliding scale fees, and some do not offer this service, but it doesn’t hurt to ask.
- Take out a personal loan. It may feel awkward to take out a personal loan to pay for your rehab, but if you’ve been stealing, selling off your possessions or doing other things to pay for your substance of choice, then it’s no stranger to take out a loan to pay for your recovery than it is to pawn your watch for drugs.
- Inquire if payment plans are available. Many rehab centers offer payment plans, depending on your circumstances. This can make the cost of rehab easier to bear.
Depending on your individual circumstances, you may need to pay for rehab completely out of pocket, then seek ways to recover the expense later through itemized deductions. No two people have the same financial circumstances or needs. Often the admissions and billing staff at a rehab center can help you figure out possible routes. They’re experienced in working with insurance companies and in helping patients get the help they need.
Knowing When It’s Time for Rehab
You may be asking yourself, “Do I need drug rehab?” If you continue answering “no” or have to defend your actions to family members, remember that one of the biggest signs of addiction is denial. This happens because alcohol and drugs negatively affect the brain’s capability to produce chemicals that help people make sound decisions, assess risk, perceive reward and remember bad events. Consequently, even the most seriously addicted person might believe they can quit at any time, even when it’s obvious to others that help is necessary.
If any of these signs sound familiar, it’s time to enroll in rehab. Whether you suffer from opiate addiction, pharmaceutical addiction, alcoholism or cocaine addiction, rehab can help you take control of your life. The right rehab program will help you gain physical strength, manage cravings and stress, reconnect with your loved ones and relax — without using drugs or alcohol.
What price do you put on your own health and wellness? When you consider the cost of rehab, it may seem overwhelming. It may help to consider how much you are currently spending on your addiction now, and what you are losing in the process. Most people lose their wealth, health, family and peace of mind. What price would you pay to get these back, and gain even more clarity and strength? That’s the price of recovery. Paying for it is just one step in the process.
If you’re looking to start your recovery process, browse our list of top-ranked rehab centers to find the best one for you.