Your 2025 Major Illness FAQs: What I Tell My Clients

Yes, but only to the extent they exceed 7.5% of your Adjusted Gross Income (AGI). Eligible expenses include:

• Hospital bills
• Prescription drugs
• Travel for medical care
• Long-term care and in-home nursing
• Health insurance premiums (if paid out-of-pocket)

You’ll need to itemize deductions to claim them. With the 2025 standard deduction at $14,600 (single) or $29,200 (married filing jointly), your total deductions must exceed those thresholds to see a tax benefit.

Client example: A client with $90,000 AGI and $12,000 in out-of-pocket medical expenses deducted roughly $5,250 — the amount above the 7.5% AGI floor.

Sometimes. The 10% early withdrawal penalty (if under age 59½) does not apply if:

• The withdrawal is used for qualified unreimbursed medical expenses above 7.5% of AGI
• You're permanently disabled
• You’ve received a terminal illness diagnosis (as defined by the SECURE Act 2.0)

However, even if penalty-free, regular income tax still applies.

CPA Insight: One mistake I see is clients withdrawing more than they need — pushing themselves into a higher tax bracket. Plan withdrawals carefully.

If available, Health Savings Accounts (HSAs) are the most tax-advantaged:

• Contributions are tax-deductible
• Growth is tax-free
• Withdrawals for qualified medical expenses are tax-free

Flexible Spending Accounts (FSAs) are great too, but use-it-or-lose-it rules apply.

A Roth IRA can be tapped for contributions at any time tax- and penalty-free — and may be a fallback if other funds are exhausted.

Here’s what I tell clients: Tap your accounts in this order — HSA first, then Roth contributions, then taxable brokerage, then traditional IRAs.

Yes. If you’re earning less or have shifted to disability or part-time income, your tax withholding should reflect that. Updating your W-4 with your employer can help avoid overpaying taxes during a difficult year.

Use the IRS Withholding Estimator to see where your current setup lands, especially if you’re transitioning from salary to disability payments or severance.

Yes — but only if the care is medically necessary, not just personal assistance. Aides must provide services under a physician’s plan of care to qualify for the medical expense deduction.

You may also be eligible for:

• The Child and Dependent Care Credit (if you pay for a caregiver while you work)
• State-level tax credits for caregiving or home modifications

Client example: A client paying $30,000 annually for professional in-home care deducted about $20,000 based on documentation from her doctor and receipts.

You may qualify for Social Security Disability Insurance (SSDI), which pays benefits if:

• You’ve worked enough quarters
• Your illness prevents you from working for 12 months or longer
• You meet the SSA’s medical criteria

Benefits are generally not taxable unless your total income (including other sources) exceeds certain thresholds.

Apply early, and expect a waiting period of five months for SSDI eligibility to begin.

Yes, if you’re age 70½ or older, you can donate up to $105,000 in 2025 from your IRA directly to a qualified charity. This:

• Satisfies all or part of your RMD
• Lowers your Adjusted Gross Income
• Keeps income-based costs (like Medicare premiums) down

CPA Insight: I often see clients in treatment wanting to give back. QCDs let you support your favorite cause and reduce taxes — without needing to itemize.

Premiums for qualified long-term care policies are deductible based on your age and subject to the 7.5% AGI rule for medical expenses.

In 2025, deduction caps range from about $470 for age 40 or under to over $5,800 for those over 70. These premiums may also be paid from HSAs tax-free.

If your policy includes a return-of-premium rider or cash value, additional tax considerations may apply.

It depends. If cash flow is tight, pausing contributions may be necessary. But if you can still contribute:

• Keep saving enough to get any employer match
• Prioritize Roth contributions if income is temporarily low (lower tax bracket now, tax-free later)

Client example: A client on leave reduced contributions to 3% just to keep her 401(k) match active — preserving long-term growth while covering short-term costs.

Indirectly. Under the Inflation Reduction Act, you may qualify for:

• Up to $1,200 in energy-efficient home improvement credits
• Up to $3,200 in combined credits if adding heat pumps, insulation, or solar

If you're upgrading your home for medical comfort and the improvement is energy-related, check for eligibility. But purely medical improvements (like stair lifts or ramps) fall under medical deductions, not energy credits.

Now is the time to:

• Execute a durable financial power of attorney
• Set up trusted contacts on all accounts
• Store passwords in a secure but accessible location

Without these, your loved ones may have to go through court to manage your affairs. It’s a conversation worth having early, especially if the illness is progressive.

Absolutely. Your estate plan should reflect your current wishes and health situation. Priorities include:

• Updating your will or trust
• Ensuring your healthcare proxy and financial POA are in place
• Reviewing beneficiary designations on IRAs, life insurance, and HSAs

Client example: A widowed client facing a terminal illness updated her plan to include specific bequests and direct charitable gifts — saving her heirs both time and taxes.

Evaluate all sources:

• Short-term disability insurance
• Long-term disability through your employer or private policy
• SSDI, as discussed earlier
• Liquid savings and emergency fund

If you’re self-employed, you may need to rely on cash reserves or business continuity coverage.

Here’s what I tell clients: Plan your income streams like plumbing — you don’t want all the pressure on one pipe.

Many states offer property tax deferrals, freezes, or discounts for:

• Low-income seniors
• Disabled homeowners
• Veterans with service-connected illnesses

These are handled at the county or state level, so check with your local assessor’s office.

Start with these actions:

• Freeze your credit reports
• Set up transaction alerts for all financial accounts
• Use a trusted contact or account co-manager
• Review your insurance coverages for gaps

Keep a log of bills, reimbursements, and insurance communications. Consider using a budgeting tool or assigning a family member to help track expenses during treatment.