THERE'S MORE TO HEALTH-CARE tax breaks than the itemized deduction.

The most common way people treat their health costs on their tax forms is by claiming an itemized deduction, on Schedule A of the 1040, for out-of-pocket medical expenses (including health and dental insurance premiums). For now, taxpayers can deduct these expenses to the extent they exceed 7.5% of adjusted gross income (AGI), or 10% for those in the dreaded alternative minimum tax. Under the Patient Protection and Affordable Care Act passed in March 2010, that threshold will rise to 10% in 2013 for all taxpayers except those aged 65 or older. For these folks, the 10% rule will go into effect in 2016.

Clearly, whether the cut-off is 7.5% or 10%, this isn't a very good deal. For example, say your AGI is $80,000 and you have $10,000 of health costs and you can deduct expenses above 7.5%. Your Schedule A itemized deduction is limited to a relatively paltry $4,000 ($10,000 minus $6,000, which is 7.5% of your $80,000 AGI). Even worse, at a 10% threshold, you would only be able to deduct $2,000 of your $10,000 expenses. This stinks!

But all is not lost. There are some strategies you can use to maximize the tax breaks of the cost of care.

Concentrate Medical Expenditures in Alternating Years

If you have some flexibility about when your medical expenses are incurred, you may be able to concentrate them in alternating years. That way, you can at least claim an itemized deduction every other year instead of never.

For example, say your annual AGI is $60,000. In 2010, you pay $7,000 of medical expenses because you have elective surgery, buy new glasses and contact lenses, and have some expensive dental work done. Next year you pay only $2,000. In 2010, you can claim a Schedule A itemized deduction of $2,500 ($7,000 minus $4,500, which is 7.5% of your $60,000 AGI). Next year, you won't be able to claim any deduction. But if you simply spread the two-year total of $9,000 worth of medical costs evenly over 2008 and 2009, you will be out of luck in both years.

When the deductibility threshold is 10%, it becomes even more important to bunch your medical expenses into alternating years to maximize your deductions.

Don't Forget Long-Term-Care Insurance Premiums

A qualified long-term-care policy is considered health insurance under the federal income tax rules. When you personally buy a qualified policy, the premiums you pay are treated as medical expenses for itemized-deduction purposes on Schedule A. However, there are limits, which vary by age. You can only treat the age-based amounts as medical costs. The maximum amount you are allowed to treat as a medical expense is adjusted for inflation each year.

Deduct Expenses Paid for Parent or Grandparent

Do you pay medical expenses for a dependent parent? If so, you can add those expenses to your own for itemized-deduction purposes. To be your dependent, however, over half of your parent's support for the year must be paid by you. If you pass the support test, you can include medical expenses paid for your parent even if you can't actually claim your parent as a dependent on Form 1040. (You can't claim a parent as a dependent if he or she files jointly or has a gross income over a modest threshold that is adjusted annually by the IRS). While you must still clear the 7.5% (or 10% starting in 2013) of AGI hurdle to claim an itemized deduction on Schedule A, including your parent's expenses in the pot may help.

The exact same considerations apply to medical expenses that you pay for a dependent grandparent.

Remember: If you pay qualifying long-term-care insurance premiums for a dependent parent or grandparent, you can treat the age-based premium amounts as medical expenses for itemized-deduction purposes.

Finally, if you pay for a dependent parent or grandparent to enter or stay in a continuing-care retirement community, you may be entitled to an unexpectedly juicy medical expense write-off for part of the cost.

What if you pay medical expenses for a parent or grandparent but don't supply over half of his support for the year? In this case, you cannot combine the parent's or grandparent's medical expenses with your own for itemized-deduction purposes.

Take Advantage of a Health-Care Flexible Spending Account

So far, I've focused on some ways to work around the dreaded AGI threshold. At best, however, these are only damage-control procedures. When possible, it's far better to simply avoid the darned threshold in the first place. Often, the easiest way to do this is to take advantage of your employer's health-care flexible spending account.

Under an employer-sponsored FSA plan, you're allowed to contribute part of your salary to fund your personal FSA. For tax purposes, these so-called salary-reduction contributions are subtracted from your pay -- which reduces your federal income tax, Social Security tax, and Medicare tax bills (and maybe your state income tax bill, too). You then submit evidence that you've incurred qualified medical expenses and receive tax-free FSA reimbursement checks to cover them. In effect, the FSA allows you to pay for those expenses with pretax dollars, which is a whole lot better than paying income and employment taxes on your entire salary and then hoping for a little relief from tax deductions.

Unfortunately, the healthcare reform act of 2010 chips away at this perk: As of 2011, FSAs can no longer be used to buy over-the-counter medications. And in 2013, annual contributions to FSAs will be limited to $2,500, down from $5,000, and will be adjusted for inflation annually after that.

Open Up a Health Savings Account

If you pay for your own medical-insurance premiums, you might consider acquiring a qualifying high-deductible health policy and then making annual tax-deductible contributions to a health savings account. You can then take tax-free HSA withdrawals to cover your uninsured medical expenses. Once again, this drill allows you to pay medical expenses with pretax dollars while neatly sidestepping the 7.5% of AGI threshold. Better yet, you may be able to leave your HSA largely or completely untouched, invest the account balance, and build up a substantial tax-favored fund to cover medical costs in the future.

Of course, the HSA idea doesn't work if you would have difficulty making annual HSA contributions due to uncertain cash flow. Also, if you or members of your family are in poor health, having high-deductible health coverage is probably not the right move for you.

Only consider an HSA if you are sure you ll use money in the account for qualified expenses. Under the healthcare reform bill of 2010, starting in 2011 you can no longer use HSA cash to buy over-the-counter medications, and the penalty for using an HSA for non-qualified expenses goes from 10% to 20%.

If You're Self-Employed...

Self-employed folks who pay their own medical and dental insurance premiums are generally allowed to deduct these costs "above the line" on page 1 of Form 1040. This rule is very helpful, because you need not itemize to benefit from an above-the-line deduction. Also, you can include the age-based amounts listed above for qualified long-term-care insurance premiums in your above-the-line write-off. Unfortunately, that's the end of the good news. In general, your only recourse for uninsured medical expenses is claiming a Schedule A itemized deduction when those costs exceed 7.5% of your AGI.

IRS-Approved Medical Expenses

Here's an alphabetical list of some commonly encountered costs that count as medical expenses for Schedule A itemized deduction purposes:

* Acupuncture
* Ambulance
* Artificial limb
* Artificial teeth
* Bandages
* Braille books and magazines
* Car (Cost of special equipment so disabled person can drive.)
* Chiropractor
* Christian Science practitioner
* Contact lenses plus wetting and cleaning solutions
* Crutches
* Dental care
* Diagnostic devices
* Drugs -- prescription only except for insulin
* Eyeglasses
* Eye surgery
* Guide dog
* Hearing aid
* Home improvements for medical purposes to extent they don't add value to home
* Hospitalization
* Insulin
* Insurance premiums for health coverage, including age-based premiums for qualified long-term-care insurance
* Laboratory fees
* Lifetime care fees (percentage of fees paid under lifetime contract with a continuing care retirement community)
* Long-term-care services
* Meals (while staying in hospital or similar facility)
* Medicare Part B premiums
* Nursing home
* Nursing services
* Operation (i.e., surgery)
* Optometrist
* Osteopath
* Oxygen
* Psychiatric care
* Psychoanalysis
* Stop smoking program
* Telephone (Cost of special equipment for the hearing impaired.)
* Television (Cost of special equipment to display subtitles for hearing impaired.)
* Therapy
* Transplant
* Transportation (to receive medical care -- 18 cents per mile for 2006 if you use your own car)
* Weight-loss program (if part of treatment for specific disease or condition, such as obesity)
* Wheelchair
* Wig (if hair is lost due to medical condition or treatment)
* X-rays

Note: For the complete list, see IRS Publication 502 (Medical and Dental Expenses), which you can view online at irs.gov.