Keep Track of Your Medical Expenses

Posted on July 26th, 2011 in Health Care, Newsletter Articles, Taxes by wayne

Years ago, most of us had such wonderful health insurance coverage that we never considered keeping track of medical expenses for tax deductions, as medical expenses were never above 7.5% of Adjusted Gross Income (AGI).  However, for many of us, those days are only fond memories.

For at least the next two tax years, the AGI medical deductible hurdle of 7.5% will remain in place.  Even if you make over $100K per year, you may find that keeping track of your medical expenses will help lower you’re the amount you pay in taxes.  Let’s look at some deductible medical expenses of which you might not even be aware:

1. Medically related travel: Whenever you must travel to a doctor’s appointment by car, for 2011, the IRS allows a mileage deduction of $.19 from January through June and $.235 for July through December.  If you must fly to an out-of-town clinic, the full cost of your flight plus a per diem allowance of $50 per person per day is deductible.

2. Medical Insurance Payments, including long term Care Insurance: If you pay for your own medical insurance, the premiums paid are fully deductible.  If you pay for long term care insurance, the premiums are deductible up to a maximum amount based on your age at the end of the tax year.  The maximum deductible amounts for long term insurance premiums are: Age 40 or less $340; Age 41 through age 50 $640; Age 51 through age 60 $1,270; Age 61 through age 70 $3,390; Age 71 or older $4,240.

3.  Uninsured medical treatments: This includes what you spend for an extra pair of eyeglasses or on contact lenses, false teeth, hearing aids or artificial limbs.

4. Rehab treatment for drug, alcohol, or any other recognized addictive disorder: This includes amounts you pay for an inpatient’s treatment at a therapeutic center for alcohol or other addictions, including meals and lodging provided by the center during treatment. You can even include amounts you pay for transportation to and from 12 Step meeting, if the attendance is pursuant to medical advice that membership is necessary for the treatment of a disease.

5. Weight-loss, smoking cessation and other health related issues: If a doctor prescribes it, you can deduct it.

6. Laser vision correction surgery: These surgeries are allowable expenses to deduct on your taxes

7. Doctor-recommended equipment and related expenses: If your doctor tells you that you need a humidifier installed on your heating and air conditioning system to aid your breathing problems, you may be able to deduct the full amount of this home improvement.

8. Home improvements or equipment: If you do a home improvement or bring in special equipment that’s considered medically necessary, for you, your spouse or your dependents, you may deduct the cost of this equipment and it’s installation. This may include special entrance/exit ramps, widening doorways, modifying kitchens or bathrooms, or adding a chairlift   If the improvement increases the value of your home, only the amount of the expense that exceeds the increase in the property value of your home is deductible.

9. Medical education costs: If you, your spouse or a dependent have a chronic medical condition and you attend a conference related to this condition, your conference admission and transportation expenses are deductible.  However, meals and lodging are not deductible.

10. Out-of-town treatment for a dependent: When accompanying a minor dependent to out-of-town medical treatment, your hotel bills will likely be at least partially deductible.

11. Nursing services: Out-of-pocket payments for a home-based nurse are fully deductible,

12. Lead paint removal: If your house has any lead paint, the full cost of lead paint removal is deductible.

13. Medical Insurance payments by the self-employed: If you are self employed, the full cost of your family’s medical insurance premiums are deducted, as an adjustment to gross income.  This payment is not subject to the 7.5% deduction hurdle, but is a direct deduction from gross income.

From this non-exhaustive list, it is obvious why it is not too difficult for medical expenses to exceed 7.5% of AGI.  Unfortunately The AGI hurdle is set to increase to 10% in 2013 under the Patient Protection and Affordable Care Act (PPACA) passed in 2010.

New Medical Taxes are Coming Your Way

Posted on July 26th, 2011 in Health Care, Newsletter Articles, Taxes by wayne

In March of 2010, the Patient Protection and Affordable Care Act (PPACA) was passed by Congress and signed by the President.  In spite of its lofty title, this act includes several “features” that will raise the amount of taxes we pay on medical related services, regardless of your income bracket.

It has always seemed inequitable to me that we may deduct 100% of our mortgage interest payments from federal income taxes, but are only allowed to deduct medical expenses that exceed 7.5% of our Adjusted Gross Income (AGI).  From this inequity, we must  assume that our government places a higher priority on buying a house than it does on medical expenses.

When PPACA was first introduced, I assumed that it would address this inequity by  eliminating the 7.5% AGI deduction hurdle on medical expenses.  This would definitely provide “more affordable (medical) care,” much like the home mortgage deduction makes home ownership more affordable. However, I was shocked to see that PPACA not only does not remove the 7.5% tax hurdle, it makes medical treatment more expensive by raising the AGI threshold hurdle to 10%.

This medical tax increase hurts the middle class much more than the wealthy, as very few tax payers, whose AGI exceeds $200K, can claim a medical deduction.

Consider a couple with $70K AGI that has $7,000 in medical bills.  Under current tax law, this couple could deduct $1,750 in medical expenses from their federal income taxes.  However, staring in 2013, PPACA will reduce their in medical deductions to $0, while they will still be able to deduct 100% of their home mortgage interest payments.

Another area where PPACA increases the middle class’ medical costs is through its reduction of Flexible Spending Account (FSA) medical contributions.  Under current law, you may contribute up to $5,000 each year to an FSA, to pay for medical expenses that are not covered by insurance.  The $5,000 FSA contribution is directly deducted from your income, meaning that it is fully tax free, including FICA taxes.

A single person in the 25% federal tax bracket (AGI exceeds $34,000), with state income taxes of 5%, has combined federal, state and FICA taxes of 37.65%.  This represents $1,882 in total taxes on $5,000 of income.  By putting $5,000 into an FSA, they save $1,882, as long as they have at least $5,000 in uncovered medical expenses during the year.

Starting in 2013, PPACA lowers the maximum amount that can be contributed to an FSA to $2,500, cutting the tax saving for a medical FSA in half.  The relatively low income person shown above will pay an additional $941 in taxes, thanks to PPACA.

For higher income taxpayers, PPACA has additional Medicare taxes.  Starting in 2013, single taxpayers earning over $200K and couples earning over $250K per year will be pay an additional 0.9% in Medicare taxes on income that exceeds these limits.

Another Medicare tax is the new 3.8% “unearned” income tax on single taxpayers with an AGI exceeding $200K and couples with an AGI exceeding $250K.  Virtually any income that does not come from employment will be subject to this tax.

As an example, consider a couple with an AGI of $300K, of which $200K comes from their joint earned income and $100K comes from royalties, rents, annuity distributions, capital gains and dividends.  $50K of their income would be subject to the 3.8% Medicare tax, increasing their tax bill by $1,900.

It can always be debated whether the “wealthy” are paying their fair share of taxes.  Thus, the PPACA provisions that require higher income individuals to pay more in taxes are open to political debate.

However, it seems unconscionable for an act that is supposed to make health care more affordable, to increase the price of health care on the middle class.  The PPACA has already been modified to remove the $600, 1099 reporting requirement.  Perhaps it is now time to help our government understand that 1) medical expenses should have at least the same deductibility as home mortgage interest payments and 2) FSAs are good for people of all income brackets, so leave them alone.

Medical costs continue to sky rocket.  The last thing that we need is to increase the taxes that everyone must pay on these expenses.