With the ever-increasing cost of health insurance and medical care, you should be ever-vigilant in cashing in on health care-related tax breaks. Unfortunately, changes taking effect this year make that harder than before. Here’s the story, along with some ways to beat the system.
New Higher Threshold for Medical Write-Offs
Before this year, you could claim an itemized deduction for medical expenses paid for you, your spouse, and your dependents, to the extent those expenses exceeded 7.5% of your adjusted gross income (AGI). The 7.5%-of-AGI hurdle was hard enough to clear. Now, thanks to the Obamacare legislation, an even higher 10%-of-AGI threshold applies to most folks. However if either you or your spouse will be 65 or older as of Dec. 31, 2—13, the 100%-of-AGI threshold won't affect you until 2017. Until then, the long-standing 7.5%-of-AGI threshold will continue to apply.
Tax-Smart Solution: Concentrate Medical Expenditures in Alternating Years
If you have flexibility about when medical expenses are incurred, you may be able to concentrate them in alternating years. That way, you can claim an itemized medical expense deduction every other year, or every third year, or whatever—instead of never.
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Example: Say your annual AGI is $70,000. In 2013, you pile up $12,000 of uninsured medical expenses because you have elective surgery, a colonoscopy, buy new glasses and contact lenses, and have some dental work done. Next year, you have only $2,000 of uninsured medical expenses. On your 2013 tax return, you can claim a medical expense deduction of $5,000 ($12,000 minus the $7,000 10%-of-AGI threshold). Next year, you won’t have any deduction. But if you simply spread the two-year total of $14,000 of
medical costs evenly over this year and next year, you would have no write-off in either year.
Countries spending the most on health care
Medical costs have been rising at an alarming rate in recent years in the U.S. and in other countries. Photo: Getty Images
Do you pay medical expenses for a dependent parent, grandparent or adult child? If so, you can add those expenses to your own for itemized deduction purposes. For a person to be your dependent, you must pay over half of his or her support for the year. If you pass the support test, you can add medical expenses you paid for the supported person to your own expenses for purposes of clearing the 10%-of-AGI (or 7.5% of AGI, whichever applies) hurdle for medical expense write-offs. This is true even if you cannot claim a dependent exemption deduction for the supported person on your return because he or she has too much income. (For 2013, you cannot claim a dependent exemption deduction if the supported person has over $3,900 of gross income or files a joint return.)
What if you pay medical expenses for someone but don't supply over half of his or her support for the year? In that case, you cannot combine that person’s medical expenses with your own for medical expense deduction purposes.
Don’t Forget Long-Term Care Insurance Premiums
A qualified long-term care policy is considered health insurance under the tax rules. Therefore, when you buy a qualified policy, the premiums count as a medical expense for medical expense deduction purposes. However, the most you can treat as medical costs are the age-based amounts listed below (these numbers are adjusted annually for inflation).