Are you thinking that you’ll save a ton of money by saving all your grocery receipts and deducting the cost of your gluten free food? Before you collect a lot of paper, take a minute to see if the savings are worth the effort. This article was originally published in 2011 and has been updated to reflect current tax law.)
At a recent celiac support group meeting a couple of people asked me what I do to calculate my tax deduction for gluten free foods. They were greatly surprised when I told them that I’ve never seriously considered taking that tax deduction. Why? Too much paperwork for too little benefit!
The Basics:
Here are the basics of this tax deduction. Several court cases and IRS Revenue Rulings make the case that (1) if you have a diagnosed medical condition AND (2) your doctor has prescribed a gluten free diet as treatment, then you may deduct the amount by which the price of the gluten free food exceeds the price of a comparable non-gluten free food as an itemized medical deduction on Schedule A.
The above paragraph becomes much more important now that so many people are taking their medical care into their own hands. If you read though the remainder of this article and still think that this tax deduction would save you money, then you MUST get a diagnosis from a doctor and he MUST “prescribe” a gluten free diet for the treatment of your diagnosed condition. The deduction for the excess cost of gluten free foods only applies to diagnosed medical conditions for which your doctor has advised you to eat a gluten free diet.
Calculating the Deduction and Record-Keeping:
Deducting your food costs from your taxes sounds great, right? It does, until you realize that you’ll have to save every single grocery receipt and then calculate the difference between every single gluten free food purchase and the price of a comparable non-gluten free food. Oh, and if you’re audited, you’ll need some way to support the prices you used for the non-gluten free food.
Some of you may still be thinking that this is worth your time. Wait, there’s more. So, once you’ve calculated how much extra money you’ve spend on gluten free groceries, you may not be able to deduct that amount. Out-of-pocket medical expenses are only deductible once they exceed 7.5% of your Adjusted Gross Income (AGI). So, if your AGI is $50,000, you can only deduct the out-of-pocket medical expenses that exceed $3,750.
I’ve prepared many, many individual tax returns and the only people that I’ve ever seen with itemized medical deductions are the ones that pay their own health insurance premiums (i.e., they have an individual health insurance policy) or they have very high out-of-pocket medical expenses due to a condition that their medical insurance doesn’t cover.
But, for argument’s sake, let’s say that you have other medical expenses that will put you over the 7.5% threshold. The actual amount of taxes that you will save from taking the deduction are only equal to the amount of the tax deduction multiplied by your tax rate. For example, if you are able to deduct $200 related to gluten free expenses and your tax rate is 15%, then the deduction will only lower your actual tax liability by $30.
How to Estimate Your Gluten-Free Tax Deduction:
I know that there are still some of you out there that are saying, “I don’t care! I hate paying taxes and I love saving money, so I’m still going to save all of my grocery receipts.” As a former tax professional, I hate to see anyone wasting time on their taxes that could be better spent on something else. Here is how you can do a quick calculation to see how much money you could save by deducting the extra prices of gluten free foods.
First, grab your most recently filed tax return. You’re going to need your AGI, which is on pg 1, line 37 of Form 1040 and your medical/dental expenses from Schedule A, Line 1. Follow the following steps to determine how much, if anything, this may save you on your taxes.
Step 1) Multiply your AGI by 7.5%.
Step 2) Subtract the non-gluten free medical/dental expenses on Line 1 of Schedule A.
Step 3) Divide the result by 52.
The number that you arrive at in Step 3 is the amount of money that you would have had to spend on gluten free groceries on a weekly basis before you could deduct $1. (And remember it’s the difference between the price of the gluten free item and a comparable non-gluten free item. Naturally gluten free items like produce would not qualify.)
Before you spend a year saving receipts and tracking prices, do it for just one week to see if the extra cost of gluten free groceries is more than the amount you calculated in Step 3. If you do spend more than that, then complete the following calculation to estimate your potential tax savings.
Step 4) Add up the cost of the gluten free items that you purchased. Subtract the cost of comparable non-gluten free items.
Step 5) Subtract the amount calculated in Step 3 from the the amount calculated in Step 4. If the
amount is zero or less, stop. Your estimated deduction will not exceed the 7.5% threshhold.
Step 6) Multiply the result in Step 5 by 52.
Step 7) Multiply the result in Step 6 by your marginal tax rate**.
The result in Step 7 is the actual amount of cash that you may expect to save on your taxes by taking an itemized deduction for the excess cost of gluten free food items. (This, of course, assumes that your income and medical expenses for future years will be consistent with the tax return you use to complete this calculation.)
Some Examples:
Here’s an example of how this might work for a family with an AGI of $80,000 and no out-of-pocket medical expenses other than gluten free groceries.
Step 1: $80,000 x 7.5% = $6,000
Step 2: $6,000 – 0 = $6,000
Step 3: $6,000 / 52 = $115
Step 4: Cost of gluten free foods ($50) – cost of non-gluten free foods ($10) = $40
Step 5: $40 – $115 = -$75 STOP!
Here’s another scenario where the deduction would result in tax savings. In this scenario, the family has income of $40,000 and pays $2,400 a year for an individual medical insurance plan (i.e., their insurance is not through their employer).
Step 1: $40,000 x 7.5% = $3,000
Step 2: $3,000 – 2,400 = $600
Step 3: $600 / 52 = $11.54
Step 4: Cost of gluten free foods ($50) – cost of non-gluten free foods ($10) = $40
Step 5: $40 – $11.54 = $28.46
Step 6: $28.46 x 52 = $1,480
Step 7: $1,480 x 15% = $222
Since this family is only making about $20/hour ($40,000 / 2080) then they may very well decide that the required record-keeping is worth their time.
So, to sum it all up, if you want to take the medical expense deduction for your excess grocery costs, you’re going to be in for a lot of paperwork. Relatively few people will benefit from the deduction even after doing all of the paperwork. But, unless you actually crunch the numbers (and remember the calculation above will only give you an estimate), you won’t know whether all of that paperwork is worth it or not. If you have an extremely low taxable income (some retirees and very low income employees) and have high out-of pocket medical expenses, then it may be worth it. If you are an employee and have employer based health insurance, you probably won’t be able to get any deduction at all.
**To find your marginal tax rate, take your taxable income from Form 1040, Line 43 and compare it to the tax rates on pg 14 of this document For example, if you are single and have a taxable income of $63,000 then your marginal tax rate is 25%.