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However, as far as I know, we should be able to deduct the full 34k from our income.

It seems a little odd to me, but is this correct?

No, medical deductions are only deductible as far as they exceed 7.5% of your AGI. So if you have an AGI of $100K, then you can only really deduct $34K - $7.5K = $26.5K.

Also, you need to exceed the standard deduction, of course, if you don't do this already. But, say you had $0 in itemized deductions, and you're married filing jointly, then of that $26.5K above, you have a standard deduction of $10,700, so only $15,800 is really actually a benefit.

And, of course, this is only a deduction, so in the 25% tax bracket, you would actually save $15,800 * .25 = $3950.

Anyway, apply your own numbers to this, but I hope I've illustrated the concepts. You can get more information in IRS Publication 502:

And yes, the gift doesn't impact this.
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