Year-End Planning for Medical Deductions

The Protecting Americans from Tax Hikes Act of 2015 is not the only recent tax law affecting year-end planning this year. One provision of the Affordable Care Act, passed back in 2010, comes into play now. For taxpayers age 65 or older, it may pay to incur optional medical expenses by December 31, 2016.

Under the Affordable Care Act, the threshold for deducting unreimbursed medical and dental outlays was raised in 2013 from 7.5 percent to 10 percent of AGI. However, the 7.5 percent hurdle was kept in place for four years for taxpayers 65 or older. (Only unreimbursed medical bills greater than the threshold can be deducted.)

Example 1: Owen Palmer, age 63, has an AGI of $100,000 in 2016 and $9,500 in medical bills. For Owen, the deductibility threshold is $10,000 (10 percent of $100,000), so he will get no medical deduction.

Example 2: Owen’s neighbor Rona Sanders, has the same $100,000 AGI and $9,500 in medical bills. However, Rona is 67, so her threshold is only $7,500 (7.5 percent of $100,000). Therefore, Rona can deduct $2,000 of her medical costs.

Starting in 2017, the 10 percent threshold will apply to everyone. Therefore, seniors have an incentive to increase their medical outlays if they will reach the lower percentage this year. Once you have cleared the relevant hurdle, all medical costs will be fully deductible.

Premiums included

You might be surprised at how many expenses can be classed as medical deductions. Medicare Part B premiums, for example, count as potentially deductible medical expenses. That is true even if you have those premiums withheld from the Social Security payments that are deposited into your bank accounts each month. The same is true for any premiums paid for Medicare Part D prescription drug plans and for money you spend directly on prescription drugs as well as for premiums paid for Medicare Supplement (Medigap) policies.

In addition, money spent on long-term care (LTC) insurance policies probably will be deductible, up to certain age-based limits. For 2016, policyholders age 41-50 can include LTC premiums up to $730 as medical expenses. The deductible amount increases to $1,460 for taxpayers age 51-60, $3,900 for taxpayers age 61-70 able to include LTC premiums, and $4,870 for taxpayers age 71 or older.

Sooner rather than later

For effective year-end tax planning, it pays to estimate your possible medical expenses for 2016 early in the fourth quarter. If you think you will be near or greater than the 7.5 percent or 10 percent threshold for tax deductions, push certain medical and dental expenses into November and December. Buy prescription eyeglasses, get physical exams, and so on if they will likely be tax deductible. If you are nowhere near the 7.5 or 10 percent levels, consider deferring health care costs until 2017, when your total outlays may reach tax deductible territory.

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