Are Rehabs Tax Deductible?

are rehabs tax deductible

Are Rehabs Tax Deductible?

Once you have made the decision to enter rehab, you are presented with a dizzying amount of options regarding the type of rehab facility, location, treatment protocols, recovery programs, and continuing care programs. The list of what questions to ask, what to look for, and what to avoid can quickly become overwhelming. One of the most commonly asked questions about rehab from prospective patients and their families is cost, and rightly so. Drug and alcohol rehab can be expensive, and the idea of taking on increased debt to break the cycle of addiction can produce feelings of anxiety and stress.  

In this article, we’ll break down the funding process for rehab and provide tips on how you can maximize the treatment you are getting for your hard-earned money. One important aspect of this is whether the treatment you receive while in rehab is tax deductible. This is something everyone should consider, as the portion that you may or may not be able to write off can significantly affect your tax return. However, there are a number of other factors to also consider when determining how to finance your drug or alcohol recovery. We’ll discuss all of these factors so that you can approach the topic with a more informed point of view, and hopefully with a firmer understanding of what is realistic for your financial situation.

Rehab and Health Insurance

One of the most important things to understand for prospective patients and their families is that drug and alcohol recovery programs are considered a healthcare cost. Many people don’t realize this, and so go into a rehab program expecting that they will have to pay for treatment out-of-pocket. There are a couple of changes that have been made in the recent past that have made paying for rehab more accessible for the majority of patients.  

The first is that drug and alcohol addiction or abuse can no longer be considered a pre-existing condition by healthcare providers. This law was passed as part of the Affordable Care Act (ACA), which eliminated discrimination or increased rates for pre-existing conditions for patients.  Prior to this law, healthcare providers could deny coverage of alcohol or drug rehab based on the fact that the insured person was addicted to drugs or alcohol prior to their enrollment in an insurance plan. This saved a lot of money for insurance companies, but made it much more difficult for many people and their families to pay for rehab.

A second important change that came about as a result of the passage of the ACA was mandatory coverage for all people in the United States. This is certainly a controversial aspect of the bill, as mandated coverage required each person that didn’t have insurance through an employer or was covered by a dependent to secure a plan through their state’s insurance marketplace and maintain coverage throughout the year.

The penalty for not having or maintaining coverage is a tax penalty at the end of the year.  Despite the robust discussion surrounding these policies, this change has resulted in more people in vulnerable populations that have continuous health care throughout the year. This change is important, as these vulnerable populations also have high rates of drug and alcohol abuse. Through the changes made by the passage of the ACA, entering a drug and alcohol rehab facility has become much more straightforward, with a large part of the costs for the rehab program paid for by the insurance agency.

By maintaining coverage throughout the year, ACA enrollees also qualify for an end-of-year tax credit based on their income, which helps offset the costs of healthcare and makes healthcare more accessible to lower-income families.  This, taken together with the other regulatory changes brought about by the passage of the ACA, has enabled greater numbers of people suffering from drug and alcohol addiction to take part in a rehab program.

However, the impact of the law has also been felt outside of the ACA insurance marketplace plans.  The regulatory changes that eliminated addiction as a pre-existing condition applies to all insurance plans in the United States, allowing people with employer-provided healthcare insurance to safely enroll in rehab with the knowledge that their coverage won’t be revoked or payment denied.

The percentage of rehab costs covered by an insurance plan varies depending on the specific plan. Because there are too many variations to dive into too deeply, we’ll outline what the most popular ACA offered plans cover. ACA plans are broken into different tiers which correspond to various levels of care.

The lowest tiers are known as Bronze plans or catastrophic plans, which cover 60% of healthcare costs and are intended to reduce the burden of emergency medical care on both the individual on the health care providers. The next tier up is a Silver plan, which covers roughly 70% of healthcare costs and may include lower deductibles and less out-of-pocket expenses. The Gold tier plan covers 80% of healthcare costs, and the Platinum covers 90%.

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The coverage ranges of these tiers may vary by state to state, but in general offer consistent levels of coverage depending on the provider.  Each of these plans includes stipulations about what procedures are covered and at what percentage they are covered, so consulting with your health care plan documentation is an important step in determining your overall out-of-pocket expenses for healthcare throughout the year.

The good news is that many of the plans have an out-of-pocket maximum that the insured person can pay in a calendar year. This number, known as a deductible, is the maximum that any person will have to pay in a year before the insurance takes over 100% of the cost of treatment. The level of this deductible varies depending on the tier of the plan and the specific healthcare provider, so it is important to determine what your out-of-pocket maximum is for the year so that you have a better understanding of your potential healthcare costs.

The ACA plans are worth outlining because their coverage represents comparable coverage to employer provided healthcare or healthcare plans secured outside of the state or federal marketplace that aren’t considered ACA plans. Nearly every health care plan in the United States has a certain deductible for specific types of treatment, an out-of-pocket maximum for the year, and a list of covered procedures and benefits.

One of the most important benefits that the ACA has provided for those that are suffering from drug and alcohol addiction is a mandate that addiction is no longer a pre-existing condition, thus bringing it under the umbrella of coverage for healthcare insurance providers.

This allows prospective patients to have the security to know that if they have insurance coverage, they can’t have their coverage revoked due to entering rehab, nor can the insurance company deny coverage based on the argument that the patient had the condition prior to signing up for health insurance.  This stipulation applies to dependents as well, which is important for parents whose children are suffering from a drug and alcohol addiction.

Financing Rehab and Taxes

The reality is that rehab can be expensive. Different treatment options for rehab can result in very different treatment costs. For example, an inpatient rehab program is generally the most expensive. These programs can last anywhere from 30-90 days, during which time the patient is receiving continued care from a team of medical experts while also paying for room and board.  Outpatient programs are generally cheaper since the patient doesn’t have to pay for room and board, and may be a good option depending on the severity and type of addiction and the location of the recovering addict in relation to the rehab facility.  

However, discussing costs with rehab can be tricky because the most important factor to consider when selecting a rehab facility is not how much it costs, but whether their philosophy, treatment programs, and staff will offer the best chances of a successful recovery.  Many people see rehab as an expense.

The HARP methodology is that rehab is an investment in the future of the recovering addict. Unlike most investments, rehab is one that can pay off exponentially, in both increased productivity and happiness in the recovering addict. Thus, the first step in exploring options for paying for rehab is to reassess how you view rehab and place it in the context of greater health, quality of life, and productivity upon achieving sobriety.

There are many different financing options for rehab, and top-tier facilities have experts trained in helping their patients and the patient’s family get the most assistance and lowest out-of-pocket costs for treatment. Discussing payment and financing options is generally conducted as part of the admissions process.

Once a comprehensive treatment plan has been outlined and agreed upon by qualified medical professionals and the patient, the cost of treatment can be assessed and then financing options can be explored.  If the patient is currently covered by health care insurance, they will most likely only be responsible for a portion of the costs of the treatment program.  

That portion will depend on the type of coverage they have, the specific coverage offered for different services under their plan, and other factors that may be specific to their unique situation.  It is important to note that many insurance plans offered through the state or federal marketplace are supplemented by Medicare and Medicaid depending on if a person qualifies for either. However, not all rehab facilities accept coverage from Medicare or Medicaid, which may impact the overall out-of-pocket expenses of going through a rehab facility.

Drug and alcohol addiction can be expensive in their own right, and many people entering rehab don’t have a ready supply of cash on hand to pay for their out-of-pocket expenses. In these cases, there are still a number of financing options available. Many rehab facilities work with private lenders that can provide loans for the out-of-pocket portion of the rehab treatment, which can reduce the immediate burden on the recovering addict.  It is important to work closely with the admissions specialist that helps you outline the payment options, and to fully explore your financing options to find the best fit for you.

As part of financing rehab, know that the costs of rehab are tax-deductible. This is because drug and alcohol recovery programs are considered a healthcare expense, with a portion that can be written off on your taxes.  As of now, in order to deduct your rehab expenses on your taxes you must itemize your deductions on the Schedule A form. Certain online programs that assist people in preparing their taxes will offer this feature and walk you through the process.  It may be worthwhile to have your taxes prepared by a professional for the year that you or a dependent was in a rehab facility, in order to get the most savings and money back on your taxes.

Because rehab is considered a medical expense, it can be added to the other medical expenses throughout the year as part of your deductions. As of now, the amount that can be written off has to exceed 10% of your adjusted gross income (AGI) for the year, unless you are 65 or older and then it has to exceed 7.5% of your AGI. Another important thing to note when preparing your taxes is that the medical expenses incurred during rehab can only be written off for the calendar year in which you paid. For example, if you or a dependent entered rehab during 2016, you would have to itemize those expenses when preparing your 2016 taxes in order to be eligible to write off those costs.

Because taxes can be confusing even for those well-versed in preparing their taxes, it is important to work with a qualified tax preparer in order to maximize your deductions.  However, rest assured that rehab is considered a medical expense and a portion of what you pay can be written off on your taxes.

This fact, combined with flexible financing options, insurance coverage, and admissions staff that understands your situation and works to help you reduce out-of-pocket expenses, can help alleviate some of the financial burden that comes with entering a drug rehab facility.  Remember, the important part of rehab is not the costs, but rather the goal of achieving lifelong sobriety for yourself or a loved one addicted to drugs or alcohol.  The money that rehab costs will, over time, become an investment that pays off dividends for yourself or a loved one.

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