When the costs of medical services are not covered under your health insurance plan, they still may be deductible on your federal income tax return. However, the Affordable Care Act has impacted the amount of medical expense deductions that may be available.
Tax Deductible Medical and Dental Expenses
The Internal Revenue Service (“IRS”) provides each taxpayer with a choice of taking a standard deduction or itemizing their deductions. Certain medical and dental expenses are tax deductible if you choose to itemize deductions on IRS Form 1040, Schedule A. The IRS defines medical care expenses as payments for the “diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body.” Generally this includes health insurance premiums, out of pocket expenses for doctors, dentists, psychiatrists, optometrists, chiropractors, lab fees and the cost of prescription drugs. Non-prescription drugs and veterinary costs (for your pets) generally do not qualify. As the IRS definition is very broad, you will want to review the complete list of qualified medical and dental expenses that are deductible that is contained in IRS Publication 502, Medical and Dental Expenses.
Medical Expense Deduction Now 10% of AGI
Calculating your “Adjusted Gross Income” or “AGI” will help you determine whether it makes sense for you to itemize your deductions. It may be determined by taking your gross income and subtracting all allowable adjustments the IRS permits. An example of some deductions per IRS Publication 502 includes the following:
Prior to the tax year of 2013, a taxpayer was able to deduct the excess of 7.5% of the taxpayer’s AGI. This meant that if you had a gross income of $105,000 and your AGI was $100,000, you would be able to deduct qualified medical expenses that exceeded $7,500. (AGI of $100,000 x 7.5% = $7,500) Beginning in the tax year of 2013 (reflected in your tax return of 2014), that threshold has increased to 10% for taxpayers who are under 65 years old. This means that using the same example would decrease the amount of tax deductible medical expenses by $2,500. (AGI of $100,000 x 10% = $10,000) So if you had $12,000 of qualified medical expenses for the year, you would have been able to deduct $4,500 under the old rules and only $2,000 under the new rules. Individuals ages 65 and over are exempt from this increase until 2017.
- Half of your self-employment tax
- Allowable retirement contributions such as those made to a deductible Individual Retirement Accounts (IRA)
- Alimony paid (which is also included in the supported spouse’s gross income)
- Contributions to certain health savings accounts
The Premium Tax Credit
You may have heard about the Obamacare tax subsidy called the "Premium Tax Credit" also called the "Advanced Tax Credit". It benefits taxpayers who have joined the "Health Insurance Marketplace". The Marketplace consists of organizations set up in each state under the Patient Protection and Affordable Care Act to provide government regulated, subsidized affordable insurance plans. Unless exempt from the program, taxpayers will be assessed a penalty by the IRS if they have not enrolled by March 31, 2014 or by a deadline date that may be provided subsequently.
The majority of taxpayers will likely receive the benefits of the tax credit indirectly. The government will provide a subsidy to your insurance company who will, in turn, offer you a lower insurance premium to pay each month. The amount of your subsidy is based upon the amount of income you projected to make during the year. You may need to make an adjustment at year end because there may be a difference between your projected and actual income. Another option is to pay the full amount of the insurance premiums each month and then enter a tax credit on your tax return at year end to claim the subsidy.
Tax Returns Medical Expense Deductions: What Qualifies and How Much
By Michael M. Wechsler |
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