Medical Expense Deduction: How the 7.5% AGI Floor Works in 2025 With HSA/FSA Coordination

For many taxpayers in the U.S., medical costs are one of the largest household expenses. The IRS allows you to deduct qualified unreimbursed medical expenses that exceed 7.5% of your Adjusted Gross Income (AGI). But in 2025, the calculation gets more complex when you also contribute to a Health Savings Account (HSA) or use a Flexible Spending Account (FSA).

This guide explains how the 7.5% AGI floor works, how HSAs and FSAs interact with itemized deductions, and what taxpayers should consider before filing their 2025 return.

📌 Understanding the 7.5% AGI Floor

The IRS rule requires that only medical expenses exceeding 7.5% of your AGI are deductible. For example, if your 2025 AGI is $80,000, the first $6,000 (7.5% of $80,000) of medical expenses is not deductible. Only expenses above that threshold can be claimed on Schedule A (Form 1040).

• Applies to all taxpayers regardless of age (seniors are no longer under a higher floor).
• Must be unreimbursed expenses (insurance reimbursements cannot be deducted).
• Applies to a wide range of medical costs including surgeries, prescriptions, dental care, and certain long-term care services.

💳 What Counts as Qualified Medical Expenses?

The IRS allows deductions for necessary medical and dental expenses such as:

• Doctor and hospital bills
• Prescription medications
• Dental and orthodontic work
• Hearing aids and medical equipment
• Long-term care services and insurance premiums (with limits)

However, non-prescription drugs (except insulin), cosmetic procedures, and general health costs (like gym memberships) are not deductible.

🏥 Coordinating With HSAs and FSAs

HSAs and FSAs are tax-advantaged accounts that let you pay for medical expenses with pre-tax dollars. However, you cannot double dip. Any expense paid from an HSA or FSA is not eligible for an itemized deduction on Schedule A.

Here’s how they work together:

• HSA (Health Savings Account): Contributions are tax-deductible, growth is tax-free, and withdrawals for medical expenses are tax-free. These reduce your out-of-pocket costs and your AGI.
• FSA (Flexible Spending Account): Contributions are pre-tax and reduce taxable income, but funds are “use it or lose it” within the plan year (with limited rollover options).

Using HSAs/FSAs lowers your AGI, which indirectly makes it harder to clear the 7.5% AGI floor for itemized deductions. Still, combining both strategies can maximize tax savings overall.

📊 Example: Medical Deduction With HSA Use

Suppose your AGI is $100,000. You incur $15,000 in medical expenses in 2025:

• You pay $5,000 through your HSA (not deductible, since already tax-advantaged).
• You pay $10,000 out of pocket.
• Threshold: 7.5% of $100,000 = $7,500.
• Deductible amount = $10,000 – $7,500 = $2,500.

Without the HSA, more would qualify for deduction, but the HSA itself provides immediate tax savings, so coordination is key.

✅ Key Takeaways for 2025 Filers

• Only medical expenses above 7.5% of AGI are deductible.
• HSAs and FSAs reduce taxable income but lower potential deductions.
• Itemizing makes sense in high-expense years, especially when combined with mortgage interest and SALT deductions.
• Plan HSA/FSA contributions strategically to balance pre-tax savings with itemized deductions.