As healthcare costs continue to rise, you should take advantage of any healthcare-related tax breaks available. Fortunately, stipulations in the Tax Cuts and Jobs Acts (TCJA) may deliver relief for individuals with medical expenses. Previously, it has been difficult for many taxpayers to meet the threshold for deducting medical expenses, but the TCJA has temporarily lowered that threshold.
What expenses are deductible?
Medical expenses may be deductible if they’re “qualified.” Qualified medical expenses include the costs of diagnosis, cure, mitigation, treatment or prevention of disease, and the costs for treatments affecting any part or function of the body. Common examples include payments to physicians, dentists and other medical practitioners, as well as equipment, supplies, diagnostic devices and prescription drugs.
You can also deduct mileage driven for healthcare-related reasons at a rate of 17 cents per mile for 2017 and 18 cents per mile for 2018. Health insurance and long-term care insurance premiums can also qualify, with certain limits.
You cannot deduct expenses reimbursed by insurance or paid with funds from a tax-advantaged account such as a Health Savings Account or Flexible Spending Account, nor can you deduct health insurance premiums if they’re taken out of your paycheck pre-tax.
The AGI threshold
Prior to 2013, you could claim an itemized deduction for qualified unreimbursed medical expenses paid for you, your spouse and your dependents, to the extent those expenses exceeded 7.5 percent of your adjusted gross income (AGI). AGI includes all taxable income items reduced by certain “above-the-line” deductions, such as those for deductible IRA contributions and student loan interest.
As part of the Affordable Care Act, a higher deduction threshold of 10 percent of AGI went into effect in 2014 for most taxpayers, and it was scheduled to apply to taxpayers age 65 or older in 2017. But under the TCJA, the lowered 7.5 percent-of-AGI deduction threshold now applies to all taxpayers for 2017 and 2018.
However, it’s important to note that this lower threshold is only temporary. Unless there is additional legislative action from Congress, the 10 percent threshold will apply to all taxpayers, including those that are age 65 and older, as of Jan. 1, 2019.
Consider “bunching” expenses into 2018
Because the threshold is scheduled to rise to 10 percent in 2019, you could potentially benefit from accelerating deductible medical expenses into 2018 — to the extent that such expenses are within your control.
However, keep in mind that you have to itemize deductions in order to deduct medical expenses, and itemizing saves tax only if your total itemized deductions exceed your standard deduction. And because the TCJA nearly doubled the standard deduction for 2018, many taxpayers who have typically itemized in the past may no longer benefit from doing so.
If you need clarification on what medical expenses are eligible and whether you may qualify for a deduction on your 2017 tax return, please reach out to your KraftCPAs tax advisor. We can also help you assess whether bunching medical expenses into 2018 could result in tax savings for you.