Addiction Recovery: Managing the Tax and Financial Realities
Dealing with drug or alcohol addiction is one of the most difficult challenges a person or family can face. Beyond the profound emotional and health struggles, there is often a complex web of financial and tax-related hurdles that follow. As individuals in Cleveland and throughout Northeast Ohio strive toward recovery, understanding these financial nuances becomes a critical part of the healing process.
Managing the economic impact of addiction involves more than just paying bills; it requires a strategic look at the potential for deducting treatment expenses, navigating the tricky waters of unemployment and disability, and utilizing employer support systems. By shedding light on these specific tax rules, we hope to help those affected—along with their families and employers—navigate the path to recovery with a clearer financial roadmap.
At Michael Dolezal & Co, we know that financial stress can be a major barrier to recovery. We want to ensure you are aware of every tool available to alleviate some of the burdens associated with this widespread issue.
The Tax Treatment of Medical Expenses
It is important to understand that, in the eyes of the IRS, alcoholism and drug addiction are treated as medical ailments. This is a crucial distinction. Because addiction is viewed as an illness that requires professional treatment, the costs associated with that treatment are generally tax-deductible as itemized medical expenses.
However, there is a threshold to keep in mind. You can only deduct unreimbursed medical expenses that exceed 7.5% of your Adjusted Gross Income (AGI). Provided you meet that floor, eligible expenses can include:
Doctors and physicians
Prescribed medications
Laboratory testing fees
Psychological services
Inpatient treatment programs
Meals and lodging provided at a therapeutic center specifically for alcohol or drug abuse treatment
Counseling sessions
Behavioral therapies
To claim these expenses for someone other than yourself, that person generally must be your spouse or dependent either at the time the medical services were provided or when the bills were paid.
Defining a "Medical Dependent"
We often field questions from parents in the Northeast Ohio area regarding adult children who are struggling with addiction. The tax code actually offers a bit of flexibility here via the "medical dependent" provision. This allows you to deduct medical expenses for an individual who might not meet every single requirement to be a standard tax dependent.
Generally, a person qualifies as a medical dependent for the purpose of itemizing deductions if:
They lived with you for the entire year as a member of your household (temporary absences for medical treatment count as living with you) OR they are related to you;
They were a U.S. citizen or resident, or a resident of Canada or Mexico, for part of the calendar year; and
You provided over half of that person’s total support for the year.
The key takeaway here is that age and income are not necessarily disqualifying factors. For example, if you have an adult child with an income who is struggling with addiction, you may still be able to deduct the rehab costs you pay on their behalf, provided the support and relationship tests are met. However, you must pay the medical providers directly—you cannot simply give the money to the dependent to pay the bill.
For Divorced Parents: If either parent qualifies to claim a child as a dependent, each parent can generally deduct the medical expenses they personally paid for that child. However, careful planning is required here. Depending on income levels and the 7.5% AGI floor, it might make more tax sense for one parent to pay the medical expenses rather than splitting them.
The Hurdle: Standard Deduction vs. Itemizing
While these expenses are technically deductible, two main hurdles often prevent taxpayers from seeing a benefit. First, as mentioned, is the 7.5% AGI floor. If your income is $100,000, the first $7,500 of medical expenses provides no tax benefit.
The second hurdle is the Standard Deduction. If your standard deduction is higher than your total itemized deductions (medical, state taxes, mortgage interest, charitable gifts), it makes no sense to itemize. With the standard deduction amounts adjusted for inflation, this bar is set reasonably high.
For the upcoming tax years, the basic standard deduction amounts are:
BASIC STANDARD DEDUCTION | ||
Filing Status | 2025 | 2026 |
Single & Married Separate | $15,750 | $16,100 |
Married Joint & Qualifying Surviving Spouse | $31,500 | $32,200 |
Head of Household | $23,625 | $24,150 |
Furthermore, if you (or your spouse if married) are age 65 or older, or blind, you are allowed an additional standard deduction:
2025: $2,000 for single/head of household; $1,600 for married/qualifying surviving spouse.
2026: $2,050 for single/head of household; $1,650 for married/qualifying surviving spouse.
Given the complexity of medical deductions, we recommend calling our office before making significant financial decisions. We can help you run the numbers to see if bunching expenses into a single year might help you surpass the standard deduction threshold.
Employment: Navigating Income and Benefits
Substance addiction doesn't just impact health; it often disrupts careers. For many of our clients, understanding how unemployment, disability, and worker's compensation interact with addiction recovery is vital for maintaining financial stability.
Unemployment Benefits
Unemployment benefits are a lifeline, but eligibility can be tricky when addiction is involved. Generally, you must lose your job through "no fault of your own" to qualify. If an employee is terminated specifically for substance abuse or violating workplace drug policies, eligibility is often jeopardized.
However, there is nuance here. If an individual demonstrates they are actively seeking rehabilitation, or if the addiction caused a temporary job loss while they pursue treatment, they may still qualify in some jurisdictions. This makes a documented treatment plan essential—not just for health, but for demonstrating a commitment to re-entering the workforce. Keep in mind that unemployment compensation is federally taxable, though tax treatment varies by state.
Disability Benefits
When addiction leads to severe, long-term health issues that prevent working, disability programs may come into play.
SSDI (Social Security Disability Insurance): To qualify, the addiction itself cannot be the material reason for the claim. Instead, the claim must be based on long-term impairments resultant from the addiction, such as liver disease or severe neurological damage. Thorough medical documentation is non-negotiable here. SSDI can be taxable depending on your total provisional income.
SSI (Supplemental Security Income): This is a need-based program. Like SSDI, the disability must be separate from the addiction itself. SSI payments are generally not taxable.
Worker’s Compensation
Worker’s comp is designed to cover injuries that happen on the job. If a workplace injury was exacerbated by addiction, or if the environment contributed to the condition, a claim might be valid. However, insurance carriers scrutinize these claims heavily. If substance use is found to be the primary cause of an accident, the claim will likely be denied.
While worker’s comp benefits are generally tax-free, there are exceptions. If you return to work on light duty, or if payments are for non-occupational sickness, those amounts may be taxable.
For Employers: Employee Assistance Programs (EAPs)
For the many mid-sized businesses we advise in the Cleveland area, we often recommend looking into Employee Assistance Programs (EAPs). These are workplace-based intervention programs designed to assist employees in resolving personal problems, including substance abuse, that may be adversely affecting their performance.
The cost of these programs is generally deductible as a business expense. EAPs provide:
Confidential Support: Employees can seek help early without fear of immediate job loss or stigma. Early intervention is far less costly—both financially and emotionally—than managing a crisis later.
Education and Prevention: Many EAPs offer workshops that help create a healthier workplace culture, proactively addressing issues before they impact the bottom line.
Charitable Contributions and Support
Finally, many families and individuals look to support the organizations that helped them.
Cash Contributions: Donations to qualified 501(c)(3) addiction support groups are deductible. Notably, starting after 2025, a new law allows non-itemizers to deduct up to $1,000 ($2,000 for joint returns) for cash contributions. This is a rare "above-the-line" deduction that doesn't require you to itemize.
Volunteering: While you cannot deduct the value of your time, you can deduct out-of-pocket expenses, such as mileage or travel costs incurred while volunteering for a qualified charity.
Navigating the intersection of tax law and recovery is rarely straightforward. Whether you are an employer looking to support your team, or a family member trying to maximize resources for a loved one's treatment, Michael Dolezal & Co is here to help. Contact us today at (216) 485-2028 or via info@cpaneeds.com to discuss your specific situation.
Want tax & accounting tips and insights?
Sign up for our newsletter.
Get In Touch With Michael Dolezal & Co
You can count on us for professional, timely, and reliable tax and accounting services. If you’re ready to get started, just fill out this form and we’ll be in touch.