Maximizing Medical Deductions Before 2013by Lee Reams in 1040 & Personal Finance
Medical expenses are deductible if you itemize your deductions. However, there is a limit on how much of those medical expenses you can deduct based upon your income for the year. Currently, only medical costs that exceed 7.5% (10% if you are subject to the alternative minimum tax of your adjusted gross income (AGI) can be deducted.
Example: Let’s say you have wages of $50,000 and interest income of $1,000 and no adjustments to your income. Your AGI is $51,000 and 7.5% of the AGI is $3,825. In this case, you would only be able to deduct your medical expenses that exceed $3,825. Thus, if your deductible medical expenses for the year were $5,000, you can only deduct $1,175.
This all changes in 2013 when, as part of the new health care provisions, the 7.5% floor is increased to 10%! So if you have been putting off discretionary medical procedures, such as braces for the children, eye surgery, new dentures, or a knee replacement, you might consider having the work done and paying for it before 2013 to take advantage of the lower AGI threshold. Costs of cosmetic surgery (other than that necessitated by an accident or illness) aren’t deductible, so don’t schedule that facelift or teeth whitening as part of this strategy.
Another technique to employ is to bunch your medical expenses into one year so you can overcome the medical threshold. So, instead of paying the orthodontist over a period of years, pay him all in one year.
Example: Your AGI is $75,000, and you are planning to pay the orthodontist $3,000 a year for a three-year period. You typically have other medical expenses each year of $2,000. 7.5% of $75,000 results in a medical expense deduction floor of $5,625. Thus, if you pay the orthodontist in installments, your total medical expense for a year would be $5,000 ($3,000 + $2,000) and you would not be able to deduct any medical because the $5,625 medical floor exceeds the $5,000 expense. However, if you paid the entire orthodontist bill in one year, your medical expenses would be $11,000 ($9,000 + $2,000) and you would have a $5,375 medical deduction.
If you are short of cash and cannot pay the entire medical bill at one time, it may be appropriate to borrow the money to pay the medical expense. However, you need to factor in the cost of borrowing the money when deciding if it makes sense to borrow.
Even if you are affected by the AMT, the bunching strategy may be able to get you over the 10% floor.
If you are a senior, age 65 (before close of year) or older, you will be able to use the 7.5% rate though 2016.
Contact one of our professionals for assistance with planning a medical strategy or to answer any questions related to the deductibility of a medical expense.
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