From Medical Emergency to Tax Trouble: How Families Are Coping
When you or a loved one is dealing with a health crisis, medical bills can feel like the last straw. When your budget is already strained, affording medical costs can be difficult. You're not alone in this struggle. Approximately 38 million Americans —about 15% of adults — said they borrowed money to pay for healthcare expenses for themselves or loved ones, according to a 2025 Gallup poll.
When you're focused on health and recovery, taxes are likely the last thing on your mind. However, medical debt can affect your taxes. Understanding the impact of healthcare expenses on your taxes can help you avoid unexpected surprises.
Key Takeaways
- If you had medical debt that was forgiven or settled for less than you owe, the discharged amount may be taxable as income.
- Withdrawals from retirement accounts may trigger taxes and penalties.
- You may be able to deduct the cost of some healthcare expenses and reduce your tax bill.
The 3 Hidden Tax Consequences of Medical Debt
When medical bills start coming in, many families have to make some hard choices. Some of these choices can provide immediate relief, but can have tax consequences later:
1. Early Retirement Withdrawals
When bills pile up, you may pull money out of a 401(k) or individual retirement account (IRA) to cover the cost. While this option gives you quick access to cash, it comes at a steep price. If you aren't 59 ½ or older, the withdrawal will incur an added 10% penalty on top of your standard income taxes. This can reduce the amount of usable cash you actually get, and increases your tax liability.
2. Forgiven or Settled Medical Debt
Sometimes, you may be able to settle medical debt for less than you owe. Or, in cases of extreme financial hardship, a hospital or medical provider may agree to forgive your debt entirely. While this can give you substantial relief, there's a catch: forgiven debt is generally considered taxable income.
You'll receive a Form 1099-C (Cancellation of Debt) with the amount of debt forgiven or discharged, and you'll have to report that amount on your taxes.
3. Missed or Late Tax Payments
When money gets tight, you may not have enough funds set aside to cover your tax bill. If that's the case, the IRS will charge you failure-to-pay penalties and interest. For individuals, the penalty is 5% of the tax due (less any tax paid on time and available credits) for each month or partial month the return is late. The penalty accrues up to a maximum of 25%.Over time, these extra charges can snowball, making it harder to get on secure financial footing.
Tax Relief Options for Families Facing Medical Crises
Although medical debt can present a challenge at tax time, there are some ways to get some relief:
Tax Deductions and Credits
With the medical expense deduction, you can deduct the amount of your medical expenses that exceed 7.5% of your adjusted gross income (AGI). For example, say your AGI was $60,000, and you spent $10,000 on medical expenses to treat a chronic health condition. You could deduct the expenses beyond 7.5% of your AGI — or $4,500 — so you could claim a deduction of $5,500.
The tax deduction is only available if you itemize your deductions, but claiming the tax deduction can help lower your tax liability, giving you a smaller tax bill.
IRS Payment Plan
If medical debt leaves you unable to pay your tax bill on time, apply for a payment plan through the IRS. You can enter into a short-term or long-term payment plan, depending on your situation, and pay off your balance over several months or even years.
You can apply for an IRS payment plan online.
Offer In Compromise (OIC)
An OIC allows you to settle your tax bill for less than you owe the IRS. Typically only available under extenuating circumstances, the IRS determines your eligibility for OIC based on your assets, expenses, and income. If you're not realistically able to pay your tax bill, the IRS could agree to settle your debt for a smaller amount.
Penalty Abatement
If you filed your taxes or paid your tax bill late due to a sudden health crisis, such as a hospitalization or death in the family, you can request a penalty abatement. With this option, you explain the circumstances and present documentation, such as hospital records or a letter from your doctor, and the IRS may waive or reduce the penalties. According to TaxRise, first-time penalty abatement is for those that have a clean compliance record and is a second-chance for those who typically follow the rules.
Contact the IRS for more information on penalty abatement.
Getting Help During Tax Season
Managing medical debt is already very challenging, and tax season can just exacerbate the problem. But you don't have to navigate it alone. Meeting with a certified tax accountant or credentialed tax professional can help you identify what options are available, from OIC to IRS payment plans. Reaching out for assistance is one of the best things you can do for peace of mind.
Real solutions for tax debt relief!
FAQs
Can medical debt affect your taxes?
Yes, medical debt can affect your taxes in several ways:
- Early withdrawals from retirement accounts to pay medical bills can lead to penalties and taxes
- Late tax payments lead to failure-to-pay penalties
- Forgiven medical debt or settled balances may be taxable as income
Is forgiven medical debt taxable?
Forgiven medical debt is usually taxable, but there are some exceptions. If you were legally insolvent at the time the debt was settled or forgiven, you may not have to pay taxes on the discharged amount.
Can I deduct medical expenses on my taxes?
Yes, medical expenses can be deducted on your taxes, but only if you itemize your taxes and your medical expenses exceed 7.5% of your AGI.