TJT Client Advisory Services

Maximizing Medical Deductions

Under federal health insurance legislation, you’ll probably find it more difficult to claim medical expenses as itemized deductions on Schedule A of your tax return, beginning in 2013. You’ll get deductions only for expenses that exceed 10% of your adjusted gross income (AGI), up from 7.5% in prior years. (Through 2016, the threshold will remain at 7.5% of AGI if you or your spouse is age 65 or older at the close of the tax year.) You cannot include medical expenses that were paid by insurance companies or other sources. This is true whether the payments were made directly to you, the person receiving the medical services (that is, your spouse or dependent), or to the provider of the medical services. Example 1: Joel Gordon, age 45, has AGI of $100,000 in 2013 and $12,000 of unreimbursed medical expenses. The 10% threshold for Joel is $10,000, so he can deduct $2,000 of his medical bills. Under prior law, his 7.5% threshold would have been $7,500, and Joel could have claimed $4,500 in medical deductions.

 The 10% solution

Even with a higher threshold, you shouldn’t give up on deducting medical expenses. Good recordkeeping and a knowledge of the rules can help you go over the 10% level in some years. In particular, you should be sure to track items, such as the following: Health insurance premiums. Even if you’re covered by an employer plan at work, you probably are contributing to the cost of your insurance. Many employers require some form of cost sharing, and employees’ share of the total has been increasing. If your contributions are withheld from your paychecks and are paid with your own after-tax dollars, don’t forget to include those amounts in your total outlays. (Note that many people have pre-tax dollars withheld, in which case they are not deductible.) Seniors are likely to be in a similar situation regarding Medicare, the federal government’s health insurance program that mainly covers individuals 65 and older. You can include the premiums you pay for Medicare Part B (medical costs) and Part D (prescription drugs). Often, the government takes those costs from your Social Security checks, so you might not realize you’ve paid them. Medicare Part B costs over $1,200 a year, so you should be sure to count the money withheld from Social Security for such premiums. In addition to ordinary health insurance, you also can include premiums you pay for long-term care insurance (subject to age-based limits), dental insurance, and contact lens coverage in the medical outlays you report as itemized deductions on Schedule A. Instead of deducting health insurance premiums as itemized deductions on Schedule A, if you are self-employed, a partner in a partnership, or a more than 2% shareholder of an S corporation, you not only can deduct your health insurance premiums, you can take the deduction “above the line” on page 1 of your tax return. There is no AGI threshold for these deductions; in fact, your self-employed health insurance deductions reduce your AGI, which may help you deduct other medical expenses. Dependents’ costs. You can include medical costs you pay for yourself and your spouse. You also can count the medical costs you incur for someone who was your dependent either at the time the medical services were provided or at the time you paid the bill. The person must be either a “qualifying child” or a “qualifying relative,” generally someone who depends on you for the necessities of life. The specific definitions are complex; our office can help you determine whether someone is a dependent for purposes of the medical expense deduction. Transportation. You can include in your medical expenses outlays for transportation that was primarily for, and essential to, medical care. Such travel can be by bus, taxi, train, or plane. When you’re taking a child for needed medical care, count those costs as well. In addition, you can include your actual out-of-pocket for medical trips by car, such as gas and oil. As an alternative, you can calculate the deductible transportation expense amount by adding up the number of miles you travel for medical reasons and multiplying the total miles by the standard medical mileage rate, which is 24 cents a mile in 2013. You can add parking fees and tolls to your medical expenses, whether you use actual expenses or the standard mileage rate. Medical travel doesn’t include commuting to and from work or travel for the general improvement of your health.

On the house

Amounts you pay for special equipment installed in your home, or for home improvements, can be included if the main purpose is medical care for you, your spouse, or a dependent. To justify the deduction, you should have a written recommendation from a doctor, prescribing the equipment or home improvement to treat a specific medical condition. IRS examples include access ramps, wider doorways, and elevators, but it’s also possible to get deductions for a swimming pool or central air conditioning, if you proceed correctly. The cost of permanent improvements may be included as a medical expense, but you must reduce the deduction by any increase in the home’s value. If the improvement does not increase the value of your home, the entire cost of the improvement can be deducted as a medical expense. Example 2: Lynn Johnson has a severe form of arthritis, and her doctor tells her to swim regularly to regain her range of motion. Lynn decides to install a pool in her home. Lynn begins by having her house appraised. After her home pool has been installed, Lynn gets another appraisal. She can claim the difference between the amount she has spent and the increase in her home’s value as a medical deduction.  Say Lynn spends $40,000 installing her pool. The beforeand- after appraisals indicate her home’s value went from $350,000 to $375,000 as a result of the improvement. Thus, Lynn spent $40,000, and her house appreciated by $25,000. She can claim the $15,000 difference as a medical expense, which may allow her to take an itemized medical deduction.