October 1, 2014
There was a major change to the threshold percentage regarding the medical expense deduction in 2013.
Starting in tax year 2013, your medical expenses now must exceed 10 percent of your adjusted gross income (AGI) for you to receive any tax benefit from those expenses. The rate prior to the change in 2013 was 7.5 percent.
The old rule of 7.5 percent still applies if the taxpayer or his spouse attains age 65 by the end of the tax year in question. Older taxpayers will receive the preferred 7.5 percent rate until 2016.
So, for tax year 2014, if one spouse of a married couple is at least 65, the couple still is subject to the former rate of 7.5 percent.
The types of medical expenses that are allowed to be deducted are the same as they were in the past. Expenses for the diagnosis and treatment of physical disorders, travel and lodging costs related to such expenses, qualified long-term care expenses and medical insurance premiums are still deductible. The limit on lodging costs of $50 per day, per individual, is the same.
The general rule is that medical expenses are deductible in the year paid. Deductible medical expenses must be substantiated. It is always a good idea to keep a copy of all medical invoices and receipts.
Your local pharmacy can give you a printout of all of your prescription activity for the entire year. This is a nice, convenient summary instead of having a bunch of individual receipts that you accumulated during the year.
The invoices, receipts and prescription summary serve as your backup. Just a canceled check without any documentation supporting it would not be considered adequate substantiation by the IRS. The IRS can disallow any unsubstantiated deduction.
The amount that you pay in medical expenses during the year is reduced by any reimbursements that you receive from your insurance company. If the insurance company covered the whole cost of a procedure, you do not have an eligible medical expense deduction. Only out-of-pocket expenses paid by the taxpayer qualify.
The medical expense deduction is not limited to qualified expenses of the taxpayer but includes the taxpayer’s spouse and dependents. The cost of providing medical insurance coverage for your family, such as any employee co-pays (if your employer provides you with medical insurance coverage), is an example. And qualified out-of-pocket expenses for the spouse and dependents qualify as well.
As an example, if you have an AGI of $50,000 and are under the age of 65, you will need more than $5,000 in qualified medical expense deductions to receive any tax benefit. If you have $7,000 of qualified medical expenses, $2,000 will qualify as a potential itemized deduction. If you do not itemize on your return, you receive no benefit from these expenses.
With insurance costs rising, companies increasing the size of employee co-pays, insurance companies limiting various types of coverage and many people out of work, it becomes more important to keep accurate records of your medical expenses to see whether you qualify for this type of itemized deduction despite the threshold being increased from 7.5 percent to 10 percent.
This article was originally posted on October 1, 2014 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at firstname.lastname@example.org.