The Medical Expense Deduction: Crossing the Threshold
August 6, 2013 : Anna Sandall- Guest Contributor
Although most of the attention given to the Affordable Care Act has been focused on the requirement that individuals obtain health insurance by 2014, you should be aware that another feature of the Act is that the medical deduction threshold increased in 2013. For prior years, if you itemized your deductions, you were able to deduct your medical costs once your expenses exceeded 7.5% of your adjusted gross income. Unfortunately for 2013, this changes. Instead of the previous 7.5% limitation, the limit is raised to 10% of your adjusted gross income. If you plan on itemizing your deductions in 2013, what may seem like a small 2.5% increase in threshold amounts may actually mean the difference between getting any medical expense deduction at all.
The good news is that with a little bit of tax planning and foresight, you may still be able to qualify for the medical expense deduction even with the new increased limitation.
First, if you are thinking of having an elective surgery or procedure that is also deductible, you may want to consider timing the surgery to coincide in a year that you will have other major medical expenses. For example, consider having Lasik eye surgery in the same year your child gets braces. Although Lasik eye surgery on its own is expensive, it may not be pricey enough to surpass 10% of your AGI. However, coupled together with a few orthodontia bills (yuck!) you are more likely to meet the threshold. Just remember that not all medical expenses are deductible – in particular – cosmetic surgeries. So just because your kid has crooked teeth does not give you an excuse to schedule a facelift!
Tip: Remember, if you do not itemize, you cannot benefit from the medical expense deduction. So for those of you for whom it is more beneficial to take the standard deduction, waiting to do all your medical procedures in one year will do you no good.
Put Off Paying Your End-of-the-Year Medical Bills
Assume that your health care costs for 2013 do not exceed the 10% threshold but that you had a major medical expense which occurred just before the beginning of 2014. You may want to hold off paying your year-end medical expenses until the following year. This is because medical expenses must be deducted in the tax year that you pay for the treatment (not necessarily when you receive the treatment). For instance, if your child has their appendix taken out at the end of 2013 but you are expecting a baby in 2014, it may make sense to work out a payment plan with your child’s doctor so that you pay the majority of the bill in 2014. The appendectomy paid for in 2014 along with the cost of a baby delivery in the same year will make it easier for you to meet the 10% threshold.
Tip: If you use this method and end up incurring interest due to a payment plan, the cost in interest may exceed your tax benefit in addition to affecting your credit rating. Therefore, talk to your tax professional before making any major financial decisions.
Pay for Treatment in Lump-Sum Instead of Installments
Next, consider paying for medical treatments up front rather than in installments. For instance, if you have a large expense that you would normally pay in quarterly or monthly installments, try to pay the entire bill before the end of the year. Paid in installments over a period spanning two different tax years, your expenses may not exceed the AGI threshold, but paid in a lump-sum along with your other medical expenses for the year, it just may.
Tip: Generally, you cannot include in your medical expense deduction payments you make for medical care (including medical insurance) to be provided “substantially beyond the end of the year.”
Exception for Older Taxpayers
Finally, remember when we couldn’t figure out what Woody Allen’s step-daughter . . . er wife, Soon Yi, was thinking when she married him? Well, for 2013 she gets the last laugh. If you are age 65 or older, you are still able to deduct your medical expenses that exceed 7.5% of your adjusted gross income through tax year 2016. Even if you are under 65 but your spouse meets the age requirement, both spouses may enjoy the lower 7.5% adjusted gross income limit regardless of whether they file a joint return. This means that although Woody Allen’s wife is only 39, she is not subject to the higher 10% limitation to her medical expenses. So to all the cradle robbers out there age 65 and older, do your significant other a favor and get down on one knee!
Navigating the medical expense deduction rules can be tricky and there are many factors to consider. Speak with your tax professional if you have questions and before making any major medical or financial decisions based on tax considerations.