For taxpayers with significant healthcare expenses, understanding how medical deductions work can result in meaningful tax savings. While the Internal Revenue Service (IRS) allows deductions for qualified medical expenses that exceed 7.5% of your Adjusted Gross Income (AGI), California applies its own rules when calculating deductions on your state return. Navigating this distinction is crucial if you’re a California resident preparing your taxes in 2025. This comprehensive guide will help you understand how the 7.5% AGI rule applies federally, how California adjusts it, and what strategies you can use to optimize your deductions.
Understanding the Federal 7.5% AGI Rule for Medical Deductions
At the federal level, taxpayers who itemize deductions on Schedule A of Form 1040 may deduct unreimbursed medical and dental expenses that exceed 7.5% of their AGI. This threshold applies uniformly across all age groups as of the 2025 tax year, and only the portion of expenses that exceeds this threshold is deductible.
Example: If your AGI is $80,000, 7.5% equals $6,000. If your qualified medical expenses total $9,000, only $3,000 ($9,000 – $6,000) is deductible on your federal tax return.
Qualifying expenses include costs for the diagnosis, cure, mitigation, treatment, or prevention of disease and treatments affecting any part of the body. These may include surgeries, doctor visits, hospital stays, prescription medications, dental care, vision services, and long-term care insurance premiums within IRS limits.
Does California Use the 7.5% Rule?
No, California does not use the 7.5% AGI threshold for medical expense deductions. Instead, California applies a 10% AGI threshold for state tax purposes. This means that you must have unreimbursed medical expenses exceeding 10% of your federal AGI to deduct any portion of them on your California income tax return.
This rule creates a divergence between the federal and state returns. It’s entirely possible to qualify for a deduction on your federal return but not on your California return, simply because of the higher threshold.
How California Applies the 10% AGI Threshold
While California doesn’t have its own AGI figure, it uses your federal AGI as the base for determining whether you qualify for the medical expense deduction. Here’s how it works:
- Calculate your unreimbursed qualified medical expenses.
- Determine 10% of your federal AGI.
- Subtract that threshold from your total expenses to determine the deductible amount.
- Enter the result as part of your itemized deductions on Schedule CA (540).
Example:
- Federal AGI: $90,000
- 10% threshold: $9,000
- Medical expenses: $10,500
- California deductible amount: $1,500
Key Differences Between Federal and California Medical Deductions
| Feature | Federal | California |
|---|---|---|
| Threshold for Deduction | 7.5% of AGI | 10% of federal AGI |
| Applies to Which AGI? | Federal AGI | Federal AGI |
| Qualified Expenses | IRS Publication 502 list | Generally conforms to federal definition |
| Age-Based Exceptions | Not applicable in 2025 | No special senior provisions |
| Form Used | Schedule A (Form 1040) | Schedule CA (540) |
What Medical Expenses Qualify for the California Deduction?
California generally conforms to the IRS definition of deductible medical expenses, which includes:
- Doctor and dentist visits
- Hospital and surgical services
- Prescription medications
- Vision and dental care
- Long-term care insurance premiums (within IRS limits)
- Health insurance premiums (if paid out-of-pocket)
- Chiropractic services and mental health therapy
- Transportation to medical appointments, including mileage
However, like the federal rules, California does not allow deductions for:
- Cosmetic surgery (unless medically necessary)
- General health products (vitamins, over-the-counter meds not prescribed)
- Gym memberships or wellness retreats
How to Claim the Deduction on Your California Return
To deduct medical expenses on your California return, you must itemize deductions rather than take the standard deduction. Here’s the process:
- Complete Schedule A on your federal tax return.
- Transfer your itemized deductions to Schedule CA (540), which is California’s adjustment schedule.
- Recalculate your medical deduction using the 10% AGI rule instead of 7.5%.
- Enter the adjusted deduction amount on Line 18 of Form 540.
When Should You Itemize in California?
Itemizing in California only makes sense if your total deductions exceed the California standard deduction. For 2025, the standard deduction amounts are:
- Single or Married/RDP Filing Separately: $5,363
- Married/RDP Filing Jointly, Head of Household, or Qualifying Widow(er): $10,726
Medical deductions often aren’t enough on their own to justify itemizing, but when combined with mortgage interest, property taxes, charitable contributions, and other deductions, they can help push you past the standard deduction threshold.
Tips to Meet or Exceed the Threshold
- Bunch expenses: If you’re near the 10% AGI threshold, consider scheduling procedures or paying for services before year-end.
- Include travel costs: Mileage, tolls, and parking for medical appointments count toward the deduction.
- Track insurance reimbursements: Only unreimbursed expenses qualify.
- Use out-of-pocket payments: Expenses paid with HSA or FSA funds cannot be claimed again.
- Maintain records: Keep all receipts, EOBs, and documentation for audit protection.
Example: Combined Federal and California Deduction Strategy
Let’s say you’re a married couple filing jointly with a federal AGI of $100,000. Your medical expenses for the year total $12,500. Here’s how the deduction works:
- Federal threshold (7.5% of AGI): $7,500
- Deductible amount on Schedule A: $5,000
- California threshold (10% of AGI): $10,000
- Deductible amount on Schedule CA (540): $2,500
So while you can claim $5,000 federally, California only allows $2,500 due to the higher threshold. If your total itemized deductions in California exceed the $10,726 standard deduction, then itemizing may be worthwhile.
Conclusion: Know the 10% Rule for California Medical Deductions
Although the federal tax system offers relief through the 7.5% AGI rule for medical deductions, California’s use of a 10% threshold means many taxpayers miss out on a state deduction unless their expenses are unusually high. Understanding this distinction is key to effective tax planning. If you anticipate large medical bills, careful timing and thorough documentation can help you cross that 10% hurdle — and reduce your tax burden at both federal and state levels.
When in doubt, consult with a tax professional to evaluate whether itemizing and claiming the California medical deduction will benefit you. A well-timed strategy could make a significant difference on your year-end tax return.
