How to Deal with Tax Changes to Itemized Medical Expenses

The new year is set to bring in an unwelcome surprise for many seniors in America when it comes to their taxes. Those 65 and older who itemize their medical expenses will now only be able to claim a deduction once their cost reaches 10% of their Adjusted Gross Income (AGI)- up from 7.5% in previous years. This change technically went into effect on December 31, 2012, but if a senior or their spouse reached the age of 65 between then and December 31, 2016, the 7.5% rate was then locked-in for that time period due to a large opposition from seniors carrying the highest burden of medical bills. However, this all changes on January 1, 2017 when the 10% cut-off for medical expenses becomes the rule, not the exception, for everyone.

So how does this deductible floor increase affect you and your family? Well, this might mean that claiming the standard deduction, instead of itemizing the medical expenses, will actually save you the most money. The best way to figure this out is to crunch the numbers on all of the medical expenses that you are allowed to claim.

First, add up all of your total expenses. The following is a list of medical costs that can qualify for deduction:

• Advance payment for lifetime care at a retirement home that is specifically allocated towards medical care

• Attending a medical conference on a chronic disease for the taxpayer, spouse, or dependents

• Capital improvements to a home for the medical care of the taxpayer, spouse, or dependents

• Cosmetic/reconstructive surgery for a deformity related to a personal injury, congenital abnormality, or disfiguring disease

• Diagnostic tests to help detect cancer, heart disease, diabetes, etc.

• Items such as braces, elastic stockings, special shoes, eyeglasses, contact lenses, wheelchairs, hearing aids, artificial teeth or limbs, etc.

• Various dental treatments

• Eye surgery

• Certain types of health insurance plan premiums

• Legal expenses that were used to authorize mental illness treatment

• Healthcare assistance providers, if ordered by a physician, for dementia patients

• Some Medicare Part A, B, and D voluntary premiums

• Qualified long-term care services

• Qualified long-term care insurance premiums, up until they reach an annual inflation-indexed limits

• Nursing services

• Payments to providers of medical services

• Prescription drugs

• Service animals for mental health

• Quit-smoking programs

• Transportation for essential medical care

• Weight-loss programs to help with specific diseases

Then, multiply your AGI, line 37 on page 1 of form 1040, by 10%. If you reach 10% in 2017 you are eligible for the deduction, if you fall under 10% then you are not. If you do not reach the necessary percentage, think about opting for the general tax credit instead.

Something important to consider in the remainder of 2016 is that if you have medical expenses that are not urgent, but need to get done eventually, purchasing them before the end of the year might be in your best interest so you can more easily meet the percentage deductible before it goes up. The same goes for unpaid dental, vision, and medical bills that you have been waiting to pay. Paying these bills off with a credit card (transaction date is what matters for IRS, not when you pay the credit card bill) counts towards this percentage, so think about this as an option if doing so will help you reach the base amount necessary to get the higher deduction in either 2016 or 2017.

On the other hand, if you, a spouse, or dependent are newly diagnosed with a condition that will result in higher medical spending in 2017, even with the increased floor deductible, moving that discretionary medical spending to next year might help you reach that higher threshold in which case it would be better to hold off.

Overall, the best thing to keep in mind with the ushering in of this tax change in the new year is to keep track of your various medical expenses and know the full extent of what you are allowed to itemize. This way you can decide whether it is best to switch to a general deduction, put your discretionary spending in 2016 to reach the lower percentage, or wait until 2017 for certain purchases. Be sure to stay informed regarding this tax change and feel free to contact Baygroup Insurance with any specific questions regarding your insurance needs.

Sources

How Seniors Can Cope with the Higher Post-2016 AGI Floor Beneath Medical Expenses. Accounting Today. Oct 27 2016. http://www.accountingtoday.com/news/tax-practice/seniors-agi-floor-medical-expenses-79355-1.html