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Understanding Deductions for Medical Expenses

Every year clients ask me what medical expenses are deductible and how they can claim such expenses on their returns. Unfortunately, as with many tax issues, there are many matters to consider when claiming medical expenses and often the final amount that can be claimed is very disappointing, especially when considering the record keeping involved.

According to the IRS, medical care includes expenses incurred for diagnosis, cure, treatment, and prevention of disease or for purposes affecting the function and structure of the body.

Internal Revenue Code 213 is the section of the tax code where the fun journey of exploring medical costs begins and the usual destination is in the more “user friendly” IRS Publication 502.

What’s Included In Medical Expenses?
According to the IRS, medical care includes expenses incurred for diagnosis, cure, treatment, and prevention of disease or for purposes affecting the function and structure of the body. These amounts also can include payments for long term care services, health insurance, drugs, and transportation and, in certain cases, lodging.

Of course, a taxpayer must reduce the medical expenses to be claimed by any payments made by an insurance policy, either directly to the medical provider or as a reimbursement to the taxpayer.

When to Deduct Medical Expenses
One of the downsides to taking advantage of claiming medical expenses is the provision relating to when to claim such expenses. Since medical costs often run in the thousands if not tens of thousands of dollars, a very real problem arises when trying to claim expenses. Frequently, I see people who must make payments to their medical provider over a period of time that can sometimes straddle tax years. This provision dictates costs must be deducted in the tax year paid as opposed to the year of medical services, so this provision can cause a problem for taxpayers.

One potential solution to this problem is paying for the medical services by credit card. Although you still owe the same amount, and in your mind you still owe the medical expenses, the IRS deems the medical bills “paid” at the time of the recording of the transaction on the credit card. Thus, the whole amount can then be claimed during that year, since now you owe the credit company and not the medical provider. Of course, the additional problem is that you now have the medical expenses sitting on a charge card and accruing interest generally at a very high rate. Should you opt for this method one must perform a careful analysis to see if the tax savings is worth the added cost of interest.

Filing Status and Whose Expenses to Include
Should a married taxpayer contemplate the Married Filing Separately status, there are some additional items. These concerns include whether you live in a community property state or not. You must also be aware of special rules that apply to expenses being paid from a jointly-owned account. You may claim expenses you paid for yourself, your spouse (oddly even if you are filing separate), and your dependents.

If you found this article helpful, be sure to check back for our next article on which medical expenses should be included in your tax preparation and which should not.

Just which medical expenses can be deducted?

In a previous blog, the the whole idea behind medical expense deductions and when to deduct and whose expenses to include was discussed. In this article, we’ll look more closely at specifically which expenses can and cannot actually be deducted.

Only about 19% of taxpayers submitting an itemized returns claimed a deduction for medical expenses.

With help from the examples below, you’ll be able to gather all of your documentation for qualifying expenses and be ready for that big moment for the tax deduction on Schedule A. However, before you get too far into the process, a word of caution. Only about 19% of taxpayers submitting an itemized return claimed a deduction for medical expenses. Just because an expense is deductible, does not mean that you will realize a tax savings. You must first complete page 1 of the 1040 and compute your Adjusted Gross Income (AGI) and take that amount and multiply it by 7.5%. You take this amount and subtract it from your medical expenses and only what is left is what is deductible.

For example let’s say you paid out $5,000 in qualified medical expenses. However, your AGI is $100,000. You must take 7.5% ($7,500) and subtract this first. As you can see you are shy by $2,500. Thus, no deduction is allowed.

Here is another example. Let’s say you still have $5,000 in qualified medical expenses. Except now your income is $50,000. 7.5% of $50,000 is $, 3,750. Thus, in this case you can deduct $1,250 ($5,000-$3,750).

Hold on though, that’s only half the battle. There is another test. You must have enough other itemizations (i.e., home mortgage interest, real estate taxes, charitable contributions, etc.) to beat the standard deduction. Therefore, you may technically have enough medical expenses, but if you don’t have enough “itemizations” to complete Schedule A to beat the standard deduction you are still out of luck.

Included Medical Costs—a Closer Look

Although the expenses covered are far too numerous to name here, some examples of items that may be overlooked when calculating your medical expenses include:

  • Devices such as crutches, wheel chairs, glasses, dentures, etc.

  • Bandages

  • Braille books and magazines

  • Fertility enhancement

  • Pregnancy test kits

  • Birth control pills

  • Guide dogs

  • Health insurance premiums including Medicare Parts B & D and certain type of Long Term Care Insurance policies

  • Stop smoking programs (except over-the-counter medicines)

  • Weight loss programs if prescribed by a doctor to treat a specific disease such as obesity, hypertension, etc.

  • Transportation expenses to receive medical care

  • Another item to be deducted, with careful calculations, is permanent capital improvements to a home to aid you or your dependents. However, if such improvements actually increase the value of your home you must first subtract any increase in home value from the costs incurred. Only the amount left, if any, is deductible.

Medical Expenses Not Included

On the contrary side, there are certain medical expenses which can’t be deducted. Oftentimes, some of these come as surprise to taxpayers.

  • Health club dues. Although you can deduct, as mentioned earlier, for weight loss programs prescribed for a diagnosed medical condition, these may not include fees for the health club

  • Funeral costs

  • Illegal medical procedures

  • Over-the-counter medicines

  • Nutritional supplements (unless recommended by a medical practitioner as a treatment for a specific condition)

  • Health Savings Accounts (HSA) and Medical Savings Accounts (MSA).

  • Flexible Savings Accounts (FSA).

  • Health Insurance Premiums funded with pre-tax premiums under IRC 125 (i.e., “cafeteria plans”).

  • Health Insurance Premiums for the self-employed.

This article is not meant to be an extensive explanation on IRC 213, and has been made to be as informative as possible without diving into every specific situation. Thus, considering the “gotcha’s” in this provision, I highly encourage you to do further research and/or seek professional guidance before tackling this issue yourself.

End of Summer Is A Great Time for Tax Planning

If you think tax planning only happens in the spring, think again. Taxes are a year-round concern and there’s no better time than the present to plan for the future. Consider the following: Fall means the end of summer and summer camp for many kids. Did you know there’s a tax credit for that? If your child attended a summer day camp (not summer school or an overnight camp) the cost of that camp may qualify for the Child and Dependent Care Credit. While this is often referred to as the “day care credit,” some summer camps also qualify. Keep good records and be sure to share them with your tax professional in the spring.

Being a college football booster can have a tax advantage.

While Fall is most often associated primary schoolers heading back to the classroom, it also means older students heading to college, and college football and there is a tax implication for both. The American Opportunity Tax Credit (AOTC), which has been extended through December 2017, is a great way to offset the costs of higher education. To qualify for the AOTC, you must meet all three of the following criteria:

  1. You, your dependent or a third party pay qualified education expenses for higher education.
  2. An eligible student must be enrolled at an eligible educational institution.
  3. The eligible student is yourself, your spouse or a dependent you list on your tax return.

The AOTC can offset 100% of the first $2,000 and 25% of the second $2,000 of qualified education expenses paid. There is a phase out for higher income taxpayers and a refundable portion for lower income taxpayers so each situation is unique.

Pay special attention to #3 as this is a conversation to have with your children before you send them off to school. If a student claims himself as a dependent, he claims the education credit as well. However, students often qualify as dependents on their parents’ return and the parents often recognize a greater tax benefit when claiming the credit. Make sure your student knows to talk to you before asserting his independence and filing his own return.

In addition to the AOTC, higher education costs can be offset by the Lifetime Learning Credit, the Tuition and Fees Deduction and the Student Loan Interest Deduction. While education tax benefits are plentiful, they are also complicated. For more information, refer to IRS Publication 970 or give us a call.

As for football, many colleges and universities charge a booster fee for the right to purchase season tickets for football and other sports. While the cost of the tickets themselves is usually not deductible, the booster fee may be. If the fee is paid to the school or for the benefit of the school and gives you the right to purchase tickets, the cost of the booster fee may be 80% deductible as an itemized deduction on Form 1040, Schedule A.

Fall also means a third estimated tax payment is due on September 15. If you are self-employed or make estimated tax payments for other reasons, don’t miss this important deadline.

Finally, fall is the perfect time to do some planning to minimize your tax bill for 2017. Has your income changed since you filed your last return? Have you started school or started a business? Married or divorced? Retired? Had a baby? Purchased a house? Incurred serious medical expenses? Changed your health insurance? These and many other life experiences can affect your tax return so planning for those events now can save you money later. Waiting until January will be too late to influence your 2017 tax bill so be sure to start thinking about next year’s tax season, this year.

5 Third Quarter Tax Moves to Make Right Now

With almost three-quarters of the year squarely behind us, now is a great time to assess your tax situation. Even though tax law changes are up in the air again this year, here are five moves, with the help of your tax professional, that you should consider right now.

Five simple, end of year, moves to make to help reduce taxes.

One – Deductions and Credits

Look at last year’s tax return and determine if you are at a point to get a good estimate of your deductions and credits. If your deductions are less than half of what they were for the full year, you will end up paying more tax. Now would be a good time to clean out the kids closet or the garage and make an in-kind charitable donation.

Two – Investment Portfolio

Many people wait until the end of the year to do tax loss harvesting on their investment accounts. However, you can take those losses at any point during the year. You can sell your securities that are at a loss to offset capital gains and up to $3,000 of ordinary income each year. Proper planning with security purchases and sales can make for big savings during tax time.

Three – Retirement Plans

Retirement plan contributions through work are often forgotten or underutilized. Many employers offer some type of match for a retirement plan and that is free money to you! If you are not contributing enough to take full advantage of the employer match, now is a great time to up your contribution. Also, if you are over 50, you can increase the deferral to the max contribution of $24,000. If you were a late starter on making those retirement contributions, you may even want to consider contributing to an IRA in addition to the 401k.

Four – Higher Education

Paying for college seems to be getting more and more difficult. By claiming some of the higher education credits that are available, you can lessen the financial burden. For some higher earners, the credits do have phaseouts. Get a head start on reviewing which credit could apply so you can make sure you don’t miss out.

Five – Estate Plan

Everyone has an estate plan; either the one you create or the one a judge determines for you. Now is the time to make sure you have your financial affairs in order and to maximize gifting strategies among spouses, family members and charitable organizations. Current estate and gift tax exemptions for 2017 are $5.49 million per taxpayer or $10.98 million per couple.

These are just five simple moves to make at this point to help reduce taxes and make sure you take advantage of a range of financial incentives. Don’t wait though, soon it will be too late, so schedule a 3Q tax review now.

Home is Where the Hearth, And Tax Breaks Are

Buying a home is the single most valuable investment most families make, and home ownership offers tax breaks that make it the foundation for your overall tax planning. While the majority of home buyers are no longer first-time buyers, the tax law provides numerous incentives to home ownership for everyone.


  • Buying, rather than renting, replaces nondeductible rent with deductible mortgage interest.
  • Taxpayers can deduct an unlimited amount of property tax they pay on any number of residences.
  • Homeowners can exclude up to $250,000 of gain ($500,000 for married couples filing jointly and certain surviving spouses) from taxable income when they sell.
  • There is no penalty for an early withdrawal from an IRA for a “first-time” homebuyer for up to $10,000 so long as the proceeds are used for acquisition of a home.
  • Self-employed individuals may deduct expenses for a portion of the home used for business. A simplified optional method for claiming a home office deduction is now available.

Unless retroactively extended by Congress, the following home-friendly provisions are not available in 2017:

  • The exclusion from gross income for discharges of qualified principal residence indebtedness,
  • The mortgage premium insurance deduction, and
  • Energy credits for environmentally friendly and ecologically responsible home-related expenditures.

You may benefit from a close review of these provisions, particularly if you are considering transactions involving your home, including selling, refinancing, or renting. Many home ownership tax benefits also apply to a second home. The best way to know for certain whether or not you qualify, is to contact your tax professional and review your individual situation.

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