Hurdles and Payoffs

May 2017

You may be missing out on tax deductions that can significantly reduce your tax burden.

And then again, you may not ... unless you are successful in clearing two IRS mandated hurdles. 

Hurdle #1: You must choose to itemize deductions on your tax return rather than opt to take the standard deduction. Notably, only about one-third of taxpayers itemize, so it’s worth asking the question to your tax advisor whether it will be beneficial to you.

Hurdle #2: You will enjoy a tax deduction for eligible medical costs that exceed 10% of your adjusted gross income (AGI). Your AGI is your earnings subject to tax. For example, if your AGI is $50,000 and your medical bills tally up to be $6,000, you can write off $1,000 as a medical expense deduction. Said another way, the first $5,000 (10% of your AGI) doesn’t count. 

Clearing Hurdle #2 typically occurs when you or a dependent has significant, major expenses due to a serious illness, injury or medical procedure. However, nowadays the 10% threshold is often breached for people with low to medium AGIs.

The reason is that itemizing deductions may be a beneficial alternative given the increase in health insurance premiums and Social Security supplement costs. People whose primary source of income is Social Security benefits and those out of work and unpaid for some period, frequently are candidates to clear the 10% AGI threshold and qualify for a medical expense tax deduction.

That said, let’s take a look at medical expenses that may qualify in calculating your deduction, along with those that don’t make the grade.

Qualifying Medical Expense Deductions

Actually, you may be surprised at the deductible items that qualify. Note: To qualify, expenses must relieve or prevent a physical or mental defect or illness. So expenses that promote general health such as vitamins or a vacation won’t pass muster.

Perhaps … the More Obvious: Payments to physicians, dentists, eye doctors, physical therapists and other qualified medical practitioners for preventative care, treatment and surgeries qualify. Additionally, you may deduct the cost of visits to mental health professionals – psychologists and psychiatrists. Prescription medications as well as appliances such as corrective lenses, crutches, wheel chairs, artificial limbs, hearing aids and false teeth are on the qualifying list as well.

Less Obvious: The IRS recognizes as valid deductions expenses that you pay for to travel for medical care. That means mileage on your car, parking fees and public transportation may all qualify.

Often Not Even Known or Anticipated:

• Divorced? You can deduct qualifying expenses that you pay for your children even if your ex claims the kids as dependents.
• Expenses you pay for any person that qualifies as your dependent (with exceptions).
• Insurance premiums for policies that cover medical care.
• Long-term care insurance (subject to limitations).
• Renovations to your home because of a medical condition or disease.
• Prescribed drugs to alleviate the effects of nicotine withdrawal. 

Deductible Long Term Medical Care Services:  We’ll start with a definition. Long-term care medical services are those that are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services that are required by a chronically ill individual and are provided pursuant to a plan of care prescribed by a licensed health care practitioner, i.e. a physician, registered nurse, social worker or other individual who meets specified requirements.

Here’s a summary description. Be sure to see your tax advisor for details.

A chronically ill individual is one who has been certified by a licensed health care practitioner in the last 12 months as unable to perform at least two activities of daily living or requires substantial supervision to protect against safety or health threats caused by the individual’s severe cognitive impairment.

Home health care may qualify. That will include medical care costs as well as services such as preparing meals, housecleaning and other tasks a chronically ill person is unable to perform.

Indirect costs linked to the home health care provider are deductible as well, e.g. meals, added cost of utilities or lodging for overnight stays and payroll taxes for the wages of a home health care agency employee.

Note: Payments to a chronically ill individual’s spouse or relative will qualify as a deduction, only if the service provider is a professional licensed to perform the service.

Nursing home costs may qualify as medical expense deductions for chronically ill individuals. This can mean a major tax break for those who can afford long term medical care at an Assisted Living facility.

The Assisted Living facility will provide its residents with the annual cost to provide medical care. That portion of applicable monthly maintenance and entrance fees may be included in the resident’s medical expense deductions.

Now to illustrate how potent these deductions may be, here is a recap of the actual accounting of medical expense deductions provided by an Assisted Living facility to its residents.

• Medical deduction for monthly fees: $1,006 for an individual and $1,847 for a couple; multiplied by the number of months resided at the facility.
• Entrance fee medical expense deduction: $58,448 for an individual and $53,537 per person for a couple.

Medical Expenses That Don’t Qualify

• Expenses that do not exceed 10% of your AGI.
• Medical expenses for which you are reimbursed, e.g. insurance or your employer.
• Non-prescription drugs except insulin.
• Cosmetic procedures are generally disallowed.
• General health expenses such as toothpaste, health club dues or diet food.
• Insurance premiums that are not tied to the actual cost of medical care.

Summary

This article is meant to provide an overview of the allowable and disallowed medical expense deductions. Clearly, every individual will have unique circumstances subject to interpretation. Since the tax savings consequences may be substantial, it makes sense to be sure you have competent professional advice.

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