Medical expenses can place a significant financial burden on individuals and families. While the federal tax code allows taxpayers to deduct qualifying medical expenses that exceed 7.5% of their adjusted gross income (AGI), this threshold often limits the deduction’s usefulness for those with moderate medical costs. However, a few states provide more favorable treatment by allowing a full deduction of qualified medical expenses without applying an AGI threshold. In this comprehensive blog, we explore which states offer this benefit, how it works, and who stands to gain the most.
Understanding the Federal AGI Threshold
Before we explore the states with 100% deduction, it’s important to understand the federal rule. Under IRS rules, you may deduct only the amount of your qualified medical expenses that exceed 7.5% of your AGI if you itemize your deductions. This threshold applies regardless of income level and often disqualifies many taxpayers from claiming meaningful deductions unless they face substantial healthcare costs in a given year.
This rule is designed to prevent small, routine medical expenses from creating tax benefits. But for those with high healthcare expenses, the threshold can still be difficult to surpass—especially if their income is relatively high or steady.
States That Offer 100% Medical Expense Deduction
Some states provide an exemption from the AGI threshold entirely. These states allow taxpayers to deduct 100% of qualified medical expenses when itemizing on their state income tax returns. Let’s review the key states where this generous benefit exists.
1. Arizona
Arizona allows taxpayers to deduct all qualified medical expenses without applying the 7.5% AGI threshold used federally. Arizona decouples from the federal threshold, which means if you itemize on your Arizona return, you can deduct the full amount of unreimbursed medical expenses. This is especially advantageous for retirees and others with steady or moderate income who still incur significant out-of-pocket medical costs.
2. Georgia
Georgia is another state that allows the deduction of 100% of medical expenses without an AGI limitation. Taxpayers who itemize can include all eligible medical expenses in their Georgia return, even if they do not exceed 7.5% of AGI. This allows more taxpayers to benefit from the deduction regardless of income level.
3. Missouri
Missouri offers a full deduction of qualified medical expenses without applying the AGI threshold. Taxpayers are allowed to deduct the total of their unreimbursed medical and dental expenses, provided they itemize. This makes Missouri one of the more taxpayer-friendly states when it comes to healthcare-related deductions.
4. Montana
Montana permits the full deduction of unreimbursed medical expenses on the state tax return. Taxpayers do not have to subtract 7.5% of their AGI from their medical expense total. This provides additional financial relief for those facing ongoing healthcare challenges.
5. Alabama
Alabama allows taxpayers to deduct 100% of qualified medical and dental expenses without reducing the amount by any percentage of their AGI. This makes Alabama one of the more generous states for healthcare-related tax relief, especially helpful for older residents and those with chronic medical conditions.
6. New Mexico
New Mexico permits a full deduction for qualified medical expenses without requiring the 7.5% AGI threshold reduction. If you itemize deductions on your New Mexico return, you may include all qualified unreimbursed medical costs in full.
7. North Dakota
North Dakota allows taxpayers to deduct the full amount of their qualified medical expenses without applying an AGI threshold. As long as the taxpayer itemizes deductions, the entire amount of out-of-pocket expenses qualifies for deduction.
States That Use Federal Threshold (7.5% AGI)
Most states that allow itemized deductions conform to the federal medical expense rules. In these states, medical expenses must exceed 7.5% of AGI before any amount becomes deductible. These states include:
- California
- Colorado
- New York
- Ohio
- Virginia
- Wisconsin
- Idaho
In these states, taxpayers must cross the same AGI threshold as at the federal level to benefit from state deductions.
States That Do Not Allow Itemized Deductions at All
Several states do not permit itemized deductions on their income tax returns. As a result, taxpayers in these states receive no benefit from reporting medical expenses. Examples include:
- Connecticut
- Massachusetts
- Pennsylvania
- Illinois
- Indiana
Even if you claim itemized deductions on your federal return, these states will not offer any additional tax relief for medical expenses.
States With No Personal Income Tax
Nine states do not have a personal income tax, meaning there is no state-level medical deduction because there is no income tax return filed by individuals. These include:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
- Tennessee
- New Hampshire (no tax on earned income, only on interest and dividends)
Tax Planning Tip: Dual Benefit for Federal and State
If you live in a state that allows 100% deduction of medical expenses without a threshold and also itemize federally, you can achieve dual tax relief. Plan your medical payments strategically—by bunching expenses into one tax year, you may cross the federal threshold and also fully deduct costs at the state level.
What Counts as a Qualified Medical Expense?
The types of expenses that qualify for deduction generally align with the IRS definition and include:
- Doctor visits and hospital care
- Prescription medications
- Health insurance premiums (if not paid pre-tax)
- Dental and vision expenses
- Long-term care services and premiums
- Medical equipment and supplies
- Transportation and travel for medical care
Always keep receipts and documentation to substantiate your deduction in case of an audit at either the federal or state level.
Conclusion: States That Offer Greater Relief
For individuals with substantial medical expenses, living in a state that allows 100% deduction without applying an AGI threshold can lead to major tax savings. States like Arizona, Georgia, Missouri, and Alabama stand out as taxpayer-friendly jurisdictions in this regard. Knowing how your state handles medical expense deductions is key to accurate tax planning and maximizing available relief.
As tax laws are subject to change, always verify current rules through your state’s Department of Revenue or consult a qualified tax professional to ensure you’re getting every deduction you’re entitled to.
