Health-Care Tax Breaks / Changes That Took Effect This Year Make It Harder to Take Advantage of Health Care-Related Tax Breaks

• BILL BISCHOFF for the Wall St. Journal writes:  
With the high cost of health insurance and medical care, taxpayers often try to be vigilant about cashing in on health-care-related tax breaks. But changes taking effect this year make that harder than before.

Before 2013, for example, patients could claim an itemized deduction for medical expenses paid for themselves, spouses and dependents to the extent those expenses exceeded 7.5% of adjusted gross income. Under the Affordable Care Act, a higher 10% threshold now applies to most people.

However, the 10% threshold won't take effect for taxpayers or their spouses who will be 65 or older as of Dec. 31 this year. For them, the lower 7.5% threshold will continue to apply until 2017.

Individuals who can elect when medical expenses are incurred may be able to concentrate them in alternating years in order to reap the highest tax benefit.

Take someone under 65, with annual adjusted gross income of $70,000, who expects to incur $14,000 in uninsured medical expenses this year and next, perhaps because of elective surgery, a routine colonoscopy, a new pair of glasses, contact lenses and dental work.

If those costs are evenly spread over two years, the taxpayer can't write off the expenses, because the annual cost—$7,000—doesn't exceed 10% of adjusted gross income, which is also $7,000 in this case. But if the majority of the expenses occur in one year, whatever amount tops the threshold can be taken as a medical expense deduction.

Here are some other tax-related issues regarding health care—and what to do about them:

• Family help. A taxpayer who covers medical expenses for a dependent parent, grandparent or adult child can add those expenses to their own for itemized deduction purposes—but only if the taxpayer provides more than half the dependent's financial support, mainly living expenses, for the year. In some cases, for instance, that could push the taxpayer over the adjusted growth income threshold.

The tax advantage exists even if a taxpayer can't claim a dependent exemption deduction because the person who receives the support has too much income. (For 2013, you can't claim a dependent exemption deduction if the person who receives support has over $3,900 of gross income or files a joint return.)

• A new cap on flexible spending accounts. This year, the health-care overhaul imposes a $2,500 cap on annual contributions to employer-sponsored flexible spending accounts for medical expenses. In the past, there was no limit, though many plans imposed their own cap.

Employee contributions to health-care FSAs are subtracted from taxable salary, and patients can then use the funds to reimburse themselves for costs insurance doesn't cover. Even with the new limit, that tax advantage still exists.

• Long-term care. Most long-term care policies are considered health insurance under tax law, so the premiums count as a medical expense and can be deducted as such. But there are deduction limits tied to a taxpayer's age (see accompanying chart).