Individual Tax Planning - Medical Expenses

First of all, thanks to those who suggested topics!

One person wanted to know why she needs to save medical receipts (or other documentation).  Health insurance claim requirements aside, unreimbursed medical expenses are sometimes deductible so if you think you may meet the requirements, you should save your medical receipts for tax time.

However, it is becoming increasingly difficult to deduct medical costs.  Beginning in 2013, the floor for medical deductions increased from 7.5% to 10% of income for those under 65 years old.  (It's still 7.5% for those over 65.)  What the "floor" means is that your medical expenses have to be at least that much to even begin putting them in your itemized deductions.  So if you make $50,000, only your medical expenses above $5,000 are deductible.

Also, keep in mind that even those expenses above the floor are only part of your other itemized deductions.  Everyone gets to choose between the standard deduction and itemized deductions, taking whichever is greater.  The standard deduction for a single person is currently $6,200.  So you would need your itemized deductions (medical expenses above the 10% floor plus other deductions such as state income taxes, mortgage interest expense, and investment expenses) must get above that $6,200 before it's even worth taking.  So, continuing with the example above, if you didn't have any other deductible expenses, you would need your medical expenses to reach $11,200 ($5,000 to reach the 10% floor plus $6,200 to get above the standard deduction) before it would even be worth taking them.

What all this means is that generally unless you had a major medical problem and very high expenses, medical expense deductions are probably not worth the trouble.  In general, most people without a mortgage do not have enough itemized deductions to take them instead of the standard deduction.

However, if you do think you may be able to take medical expenses, remember that medical mileage is also deductible at $.235/mile.  So keep track of your mileage using a log (available from your accountant at no charge :) ) or a mileage tracking app on your smart phone.  For other medical expenses, keep receipts and bills.

There are other benefits for medical spending if you meet certain requirements.  One of my favs is the Health Savings Account (HSA).  This will allow you to take an above-the-line deduction (meaning no floor to meet, and don't have to top the standard deduction) for the amount you contribute to your HSA.  The max is $3,300 for someone covered by a single-only insurance plan, or $6,550 for someone with family coverage.  There is an additional amount for those older than 55 of $1,000.  Then you can take deductions from the account tax-free up to the amount of unreimbursed medical costs (there is no waiting period).  The catch is you have to be covered by a "high-deductible health plan".  Most insurance companies offer these types of plans; contact them to see what is available and if you qualify.  Note that if you are covered by a Flexible Spending Account (FSA) at work, you do not qualify.

Speaking of FSA's, that is another benefit that you should be taking maximum advantage of if it's available.  The income you put into an FSA is exempt from not only income tax, but also payroll taxes, making it unique among medical tax benefits.  Check with your employer to see if they offer such a plan.  The maximum you can contribute is $2,500 but there are no floors to meet.  Also keep in mind if you put money in the plan and don't take it out for unreimbursed medical expenses during the year (or in some cases in the first three months of the following year), you will lose the money.  So be cautious not to contribute too much.  You generally make these elections once at the beginning of the year and are not allowed to change them.

Thanks for reading and welcome back to my blog!  Leave me a comment below with your feedback.


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