Medical Expenses

The Tax Deductibility of Medical Expenses

Individual taxpayers may be able to claim medical expense deductions on their tax returns. However, the rules can be challenging, and it can be difficult to qualify. Here are six points to keep in mind:

1. You must itemize to claim this deduction. 

To benefit from itemizing, your total itemized deductions must exceed your standard deduction. Besides medical expenses, itemized deductions may include property taxes, state and local income tax, mortgage interest, charitable donations, etc., subject to various rules and limits.

With the increased standard deduction that’s been available in recent years, far fewer taxpayers are benefitting from itemizing. For 2021, the standard deduction is $25,100 for married couples filing jointly, $18,800 for heads of households and $12,550 for singles.

2. Your expenses must be fairly significant. 

The medical expense deduction can be claimed only to the extent your eligible costs exceed 7.5% of your adjusted gross income (AGI). Remember, expenses paid via tax-advantaged accounts (such as Flexible Spending Accounts or Health Savings Accounts) or reimbursable by insurance aren’t deductible.

If you’ll benefit from itemizing deductions this year and your year-to-date medical expenses are close to exceeding the 7.5% of AGI “floor,” moving or “bunching” nonurgent medical procedures and other controllable expenses into this year may allow you to exceed the 7.5% floor and benefit from the medical expense deduction. If your expenses already exceed the floor, bunching can increase your deduction.

3. Health insurance premiums may help. 

This can total thousands of dollars a year. Even if your employer provides health coverage, you can deduct the portion of the premiums that you pay, unless you paid them pre-tax. (Check with your employer if you’re not sure).

Long-term care insurance premiums are also included as medical expenses, subject to limits based on age.

4. Count transportation expenses too. 

The cost of getting to and from medical treatments counts as a medical expense. This includes taxi fares, public transportation or using your own car.

Car costs can be calculated at 16 cents a mile for miles driven in 2021, plus tolls and parking. Alternatively, you can deduct certain actual costs (such as for gas and oil) that directly relate to your medical transportation.

5. Controllable costs are key. 

These include the costs of glasses, hearing aids, dental work, mental health counseling and other ongoing expenses in connection with medical needs. Purely cosmetic expenses generally don’t qualify.

Prescription drugs (including insulin) qualify, but over-the-counter medications and vitamins don’t. Neither do amounts paid for treatments that are illegal under federal law (such as medical marijuana), even if state law permits them. The services of therapists and nurses can qualify if they relate to medical conditions and aren’t for general health.

6. Don’t overlook smoking-cessation and weight-loss programs. 

Amounts paid for participating in smoking-cessation programs and for prescribed drugs designed to alleviate nicotine withdrawal are deductible. However, nonprescription nicotine gum and patches aren’t.

A weight-loss program is deductible if undertaken as treatment for a disease diagnosed by a physician. Deductible expenses include fees paid to join a program and attend periodic meetings. The cost of diet food isn’t deductible.

2 More Ways Parents Are Benefitting from the American Rescue Plan Act

When you think back on this spring, you may fondly recall a substantial deposit made to your bank account by the federal government (if you were eligible). Economic Impact Payments were a focal point of the American Rescue Plan Act (ARPA), signed into law in March, and the payments were even larger for parents with dependent children. But ARPA contains two other provisions that benefit parents:

1. Child credit expansion and advance payments. 

For 2021, this refundable tax credit has been increased from $2,000 to $3,000 per child — $3,600 for children under six years of age. In addition, qualifying children now include 17-year-olds.

The child credit is subject to modified adjusted gross income (AGI) phaseout rules and begins to phase out when MAGI exceeds:

  • $400,000 for married couples who file a joint return, and
  • $200,000 for other taxpayers.

The increased credit amount ($1,000 or $1,600) is subject to lower income phaseouts than the ones that apply to the first $2,000 of the credit. The increased amount begins to phase out when MAGI exceeds:

  • $150,000 for joint filers,
  • $112,500 for heads of household, and
  • $75,000 for other taxpayers.

ARPA also calls for the IRS to make periodic advance payments of the child credit totaling 50% of the estimated 2021 credit amount. The IRS has announced the payments will begin on July 15, 2021. They’ll then be made on the 15th of each month (unless the 15th falls on a weekend or holiday).

Recipients will receive the monthly payments through direct deposit, paper check or debit cards. The IRS says that it is committed to maximizing the use of direct deposit.

2. Child and dependent care break increases. 

For 2021, the amount of qualifying expenses for the refundable child and dependent care credit has been increased to:

  1. $8,000 (from $3,000) if there’s one qualifying care individual; and
  2. $16,000 (from $6,000) if there are two or more such individuals.

The maximum percentage of qualifying expenses for which credit is allowed has been increased from 35% to 50%. So the credit ultimately is worth up to $4,000 or $8,000. But the credit is subject to an income-based phaseout beginning at household income levels exceeding $125,000.

The amount you can contribute to a child and dependent care Flexible Spending Account (FSA, also sometimes referred to as a “dependent care assistance program”) also has been increased. For 2021, it’s $10,500 (up from $5,000 for 2020). The FSA pays or reimburses you for these expenses. But you can’t claim a tax credit for expenses paid by or reimbursed through an FSA.

Protect Your Estate with These Two Essential Documents

Estate planning isn’t just about what happens to your assets after you die. It’s also about protecting yourself and your loved ones. To ensure that your wishes are carried out, and that your family is spared the burden of guessing — or arguing over — what you would decide, put those wishes in writing. Generally, that means executing two documents:

1. A Living Will

This document expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, invasive diagnostic tests, and pain medication. It also specifies the situations in which these procedures should be used or withheld. Living wills often contain a “do not resuscitate” order, often referred to as a “DNR,” which instructs medical personnel not to perform CPR in the event of cardiac arrest.

2. A Health Care Power of Attorney (HCPA)

This document authorizes a surrogate — your spouse, child, or another trusted representative — to make medical decisions or consent to medical treatment on your behalf if you’re unable to do so. It’s broader than a living will, which generally is limited to end-of-life situations, though there may be some overlap. An HCPA might authorize your surrogate to make medical decisions that don’t conflict with your living will, including consenting to medical treatment, placing you in a nursing home or other facility, or even implementing or discontinuing life-prolonging measures.

It’s a good idea to have both a living will and an HCPA or, if allowed by state law, a single document that combines the two. Contact Maggart if you have questions regarding either one or about any other aspect of the estate planning process.

Seniors: Medicare Premiums Could Lower Your Tax Bill

Americans who are 65 and older qualify for basic Medicare insurance, but they may need to pay additional premiums to get the level of coverage they desire. The premiums can be expensive — especially if you’re married and both you and your spouse are paying them. One aspect of paying premiums might be a positive, however: If you’re eligible, they may help lower your tax bill.

Premium Tax Deductions

Premiums for Medicare health insurance can be combined with other qualifying health care expenses for purposes of possibly claiming an itemized deduction for medical expenses on your individual tax return. This includes amounts for “Medigap” insurance and Medicare Advantage plans.

Some people buy Medigap policies because Medicare Parts A and B don’t cover all their health care expenses. Coverage gaps include co-payments, co-insurance, deductibles and other costs. Medigap is private supplemental insurance that’s intended to cover some or all gaps.

Fewer Itemizers

Qualifying for a medical expense deduction can be difficult for a couple of reasons. For 2019, you can deduct medical expenses only if you itemize deductions and only to the extent that total qualifying expenses exceeded 7.5% of AGI.

The Tax Cuts and Jobs Act nearly doubled the standard deduction amounts for 2018 through 2025. For the 2019 tax year, the standard deduction amounts are $12,200 for single filers, $24,400 for married joint-filing couples and $18,350 for heads of households. So, fewer individuals are claiming itemized deductions. However, if you have significant medical expenses (including Medicare health insurance premiums), you may be able to itemize and collect some tax savings.

Important note: Self-employed people and shareholder-employees of S corporations can generally claim an above-the-line deduction for their health insurance premiums, including Medicare premiums. That means they don’t need to itemize to get the tax savings from their premiums.

Other Deductible Medical Expenses

In addition to Medicare premiums, you can deduct a variety of medical expenses, including those for ambulance services, dental treatment, dentures, eyeglasses and contacts, hospital services, lab tests, qualified long-term care services, prescription medicines, and others.

Keep in mind that many items that Medicare doesn’t cover can be written off for tax purposes, if you qualify. You can also deduct transportation expenses to get to medical appointments. If you go by car, you can deduct a flat 20-cents-per-mile rate for 2019.

More Information

Contact Maggart if you have additional questions about Medicare coverage options or claiming medical expense deductions on your personal tax return. Our team can help you identify an optimal overall tax-planning strategy based on your personal circumstances.

Federal Tax Relief to Alleviate COVID-19 Hardships

The massive Coronavirus Aid, Relief and Economic Security (CARES) Act includes numerous tax-related provisions. But before the CARES Act was signed into law March 27, the federal government provided other valuable tax relief in response to the novel coronavirus (COVID-19) pandemic. Here is a closer look.

Families First Coronavirus Response Act

On March 18, President Trump signed into law the Families First Coronavirus Response Act. In certain situations, it mandates paid leave benefits for small business employees affected by COVID-19. The paid leave provisions generally apply to employers with fewer than 500 employees, though employers with fewer than 50 employees may be eligible for an exception. Here are the benefits:

Paid Sick Leave

The law requires covered employers to provide 80 hours of paid sick leave for full-time employees in certain situations. (Part-time employees are entitled to this paid sick leave for the average number of hours worked over a two-week period.)

Generally, paid sick leave is required when an employee is subject to a COVID-19-related quarantine or isolation order, has been advised to self-quarantine or is seeking a medical diagnosis for COVID-19 symptoms. It’s also generally required when an employee is caring for someone subject to a COVID-19-related quarantine or isolation order or is caring for a child whose school or place of care has been closed, or whose childcare provider is unavailable, due to COVID-19 precautions.

When leave is taken for an employee’s own COVID-19 illness or quarantine, the leave must be paid at the employee’s regular rate, up to $511 per day (up to $5,110 in total). When the leave is related to caring for someone else, the leave must be paid at a minimum of two-thirds of the employee’s usual pay, up to $200 per day (up to $2,000 in total).

Paid Family Leave

The law gives an employee the right to take up to 12 weeks of job-protected family leave if the employee’s child’s school or childcare location is closed due to COVID-19. The first two weeks are unpaid (though they might qualify for sick pay). For the remaining 10 weeks, the employer must pay at least two-thirds of the employee’s usual pay, up to a maximum of $200 per day, subject to an overall maximum of $10,000 in total family leave payments.

Tax Credit for Employers

To help employers cover this paid leave, the law allows a refundable tax credit equal to 100% of qualified sick leave wages and family and medical leave wages paid by the employer.

The credit applies only to eligible leave payments made during the period beginning on the effective date of April 1, 2020, and ending on December 31, 2020.

Tax credits may also be available to certain self-employed individuals.

Federal tax deadline deferrals

On March 18, the IRS released guidance that outlined the details of a postponed deadline for paying federal income taxes. Notice 2020-17 clarified that individual taxpayers and corporations can defer until July 15 federal income tax payments that would otherwise be due on April 15.

Notice 2020-18 subsequently provided additional clarifications, including a postponement of the federal income tax filing deadline to July 15 as well.

Some specifics under these relief measures are as follows:

For Individuals:

Individual taxpayers can defer federal income tax payments (including any self-employment tax) owed for the 2019 tax year from the normal April 15 deadline until July 15. They can also defer initial quarterly estimated federal income tax payments for the 2020 tax year (including any self-employment tax) from the normal April 15 deadline until July 15.

For Corporations:

Corporations that use the calendar year for tax purposes can defer until July 15 federal income tax payments that would otherwise be due on April 15. This relief covers the amount owed for the 2019 tax year and the amount due for the first quarterly estimated tax payment for the 2020 tax year. Both of those amounts would otherwise be due on April 15.

For Trusts & Estates:

Trusts and estates pay federal income taxes, too. Normally, federal income tax payments for the 2019 tax year of trusts and estates that use the calendar year for tax purposes would be due on April 15. The initial quarterly estimated federal income tax payments for the 2020 tax year of trusts and estates that use the calendar year for tax purposes would also normally be due on April 15. These deadlines have also been postponed to July 15.

Notice 2020-20 postponed the filing and payment deadlines for 2019 federal gift and generation-skipping transfer taxes from April 15 to July 15.

Moving Target

We’ve covered only some of the COVID-19-related tax law changes that have already been finalized. There are also other types of federal relief under the CARES Act and through federal agencies. And many states have announced their own COVID-19 relief. More federal measures and additional guidance are expected, some of which could affect the relief discussed here. Contact Maggart to discuss which relief measures may apply in your specific situation.

Year-End Tax & Financial To-Do List for Individuals

With the dawn of the new year on the near horizon, here’s a quick list of tax and financial to-dos you should address before this year ends:

Check your Flexible Spending Account (FSA) balance. 

If you have an FSA for health care expenses, you need to incur qualifying expenses by December 31 to use up these funds or you’ll potentially lose them. (Some plans allow you to carry over up to $500 to the following year or give you a 2½-month grace period to incur qualifying expenses.) Use expiring FSA funds to pay for eyeglasses, dental work or eligible drugs or health products.

Max out tax-advantaged savings. 

Reduce your income by contributing to traditional IRAs, employer-sponsored retirement plans or Health Savings Accounts to the extent you’re eligible. (Certain vehicles, including traditional and SEP IRAs, allow you to deduct contributions on your return if they’re made by April 15th.)

Take required minimum distributions (RMDs). 

If you’ve reached age 70½, you generally must take RMDs from IRAs or qualified employer-sponsored retirement plans before the end of the year to avoid a 50% penalty. For instance, if you turned 70½ in 2019, you had until April 1, 2020, to take your first RMD. But keep in mind that, if you defer your first distribution, you’ll have to take two next year.

Consider a qualified charitable distribution (QCD). 

If you’re 70½ or older and charitably inclined, a QCD allows you to transfer up to $100,000 tax-free directly from your IRA to a qualified charity and to apply the amount toward your RMD. This is a big advantage if you wouldn’t otherwise qualify for a charitable deduction (because you don’t itemize, for example).

Use it or lose it. 

Make the most of annual limits that don’t carry over from year to year, even if doing so won’t provide an income tax deduction. For example, if gift and estate taxes are a concern, make annual exclusion gifts up to $15,000 per recipient. If you have a Coverdell Education Savings Account, contribute the maximum amount you’re allowed.

Contribute to a Section 529 plan. 

Sec. 529 prepaid tuition or college savings plans aren’t subject to federal annual contribution limits and don’t provide a federal income tax deduction. But contributions may entitle you to a state income tax deduction (depending on your state and plan).

Review withholding. 

The IRS cautions that people with more complex tax situations face the possibility of having their income taxes under-withheld because of changes under the Tax Cuts and Jobs Act. Use its withholding estimator (available here) to review your situation.

If it looks like you could face underpayment penalties, increase withholding from your or your spouse’s wages for the remainder of the year. (Withholding, unlike estimated tax payments, is treated as if it were paid evenly over the year.)

For assistance with these and other year-end planning ideas, please contact the team at Maggart.

Is “Bunching” Medical Expenses Still Feasible in 2019?

Some medical expenses may be tax deductible, but only if you itemize deductions and you have enough expenses to exceed the applicable floor for deductibility. With proper planning, you may be able to time controllable medical expenses to your tax advantage.

The Tax Cuts and Jobs Act (TCJA) made bunching such expenses beneficial for some taxpayers. At the same time, certain taxpayers who’ve benefited from the medical expense deduction in previous years might no longer benefit because of the TCJA’s increase to the standard deduction.

The Changes

Various limits apply to most tax deductions, and one type of limit is a “floor,” which means expenses are deductible only to the extent that they exceed that floor (typically a specific percentage of your income). One example of a tax break with a floor is the medical expense deduction.

Because it can be difficult to exceed the floor, a common strategy is to “bunch” deductible expenses into one year where possible. The TCJA reduced the floor for the medical expense deduction for 2017 and 2018 from 10% to 7.5% of adjusted gross income (AGI).

However, beginning January 1, 2019, taxpayers may once again deduct only the amount of the unreimbursed allowable medical care expenses for the year that exceeds 10% of their AGI. Medical expenses that aren’t reimbursed by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible.

Itemizing Deductions

If your total itemized deductions won’t exceed your standard deduction, bunching medical expenses into 2019 won’t save you tax. The TCJA nearly doubled the standard deduction. For 2019, it’s $12,200 for singles and married couples filing separately, $18,350 for heads of households, and $24,400 for married couples filing jointly.

If your total itemized deductions for 2019 will exceed your standard deduction, then bunching nonurgent medical procedures and other controllable expenses into 2019 may allow you to exceed the floor and benefit from the medical expense deduction. Controllable expenses might include prescription drugs, eyeglasses, contact lenses, hearing aids, dental work, and some types of elective surgery.

Learn More

As mentioned, bunching doesn’t work for everyone. For help determining whether you could benefit, please contact Maggart.