If you spend more than 7.5% of your adjusted gross income on medical expenses, such as:

  • insurance (including Medicare B and Medicare D premiums, but not other pre-tax premiums)
  • prescriptions
  • medical procedures
  • other out-of-pocket expenses
  • mileage to and from medical facilities (16.5 cents per mile in 2010),

then you may deduct the amount that exceeds that figure. Keep in mind, you must itemize income tax deductions to claim medical deductions. Also, your health insurance premiums can't be deducted if they're taken out of your paycheck as pre-tax dollars.

If your employer has a section 125 plan — sometimes referred to as a flexible spending arrangement (FSA) or medical reimbursement arrangement — consider using it to pay your medical expenses, as an FSA lets you set aside some of your salary to cover your expected medical expenses for the year. After you pay the expenses, you submit receipts to the plan administrator, who then issues you a check for the amount you paid. However, you can't deduct expenses you pay with pre-tax dollars like the amounts paid using your employer's FSA.

Because medical bills are deductible only to the extent that they exceed 7.5% of your AGI, timing your payments may be beneficial.

Disability is taxable if you receive payments based on premiums paid by your employer, but not taxable if you pay the premiums. If you're caring for a disabled person, you may be able to claim the Dependent Care Credit. Disabled individuals must be unable to care for themselves for you to qualify for the credit. An eligible disability prevents an individual from engaging in any substantial gainful activity because of a medically determined physical or mental impairment that is expected to result in death, or that has lasted or is expected to last for a continuous period of at least 12 months.