With rising health care costs, claiming whatever tax breaks related to health care that you can is more important than ever. But there is a threshold for deducting medical expenses that may be hard to meet. Fortunately, the Tax Cuts and Jobs Act (TCJA) has temporarily reduced the threshold.
What expenses are eligible?
Medical expenses may be deductible if they are ‘qualified.’ Qualified medical expenses involve the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. Examples include payments to physicians, dentists, and other medical practitioners, as well as equipment, supplies, diagnostic devices, and prescription drugs.
Mileage driven for health-care-related purposes also is deductible at a rate of 17 cents per mile for 2017 and 18 cents per mile for 2018. Health insurance and long-term care insurance premiums also can qualify, with certain limits.
Expenses reimbursed by insurance or paid with funds from a tax-advantaged account such as a Health Savings Account or Flexible Spending Account cannot be deducted. Likewise, health insurance premiums are not deductible if they are taken out of your paycheck pre-tax.
The adjusted gross income threshold
Before 2013, you could claim an itemized deduction for qualified unreimbursed medical expenses paid for you, your spouse and your dependents, to the extent those expenses exceeded 7.5 percent of your adjusted gross income (AGI). AGI includes all your taxable income items reduced by certain ‘above-the-line’ deductions, such as those for deductible individual retirement account contributions and student loan interest.
As part of the Affordable Care Act, a higher deduction threshold of 10 percent of AGI went into effect in 2014 for most taxpayers and was scheduled to go into effect in 2017 for taxpayers age 65 or older. However, under the TCJA, the 7.5%-of-AGI deduction threshold now applies to all taxpayers for 2017 and 2018.
However, this lower threshold is temporary. Beginning January 1, 2019, the 10 percent threshold will apply to all taxpayers, including those age 65 and older, unless Congress takes additional action.
Consider ‘bunching’ expenses into 2018
Because the threshold is scheduled to increase to 10 percent in 2019, you might benefit from accelerating deductible medical expenses into 2018, to the extent they are within your control.
However, keep in mind that you have to itemize deductions to deduct medical expenses. Itemizing saves tax only if your total itemized deductions exceed your standard deduction. Also, with the TCJA’s near doubling of the standard deduction for 2018, many taxpayers who have typically itemized may no longer benefit from itemizing.
Contact us if you have questions about what expenses are eligible and whether you can qualify for a deduction on your 2017 tax return. We also can help you determine whether bunching medical expenses into 2018 will likely save you tax.