Friday, January 24, 2014

What to Know About the New Rules for Medical IRS Tax Deductions

Bonnie Lee for Fox Business writres: Unless you rack up an enormous amount of medical and dental bills during the year, it is difficult to get a deduction for medical expenses.
Unlike other deductions like property taxes and mortgage interest, you are not allowed to write off the grand total of your medical bills. For 2013, you must subtract 10% (an increase from 7.5%) of your adjusted gross income from your total medical expense and the remainder is what you are allowed to deduct on Schedule A, Itemized Deductions.
For example, your total medical expense for the year is $10,000.  If your adjusted gross income is $100,000 multiply that by 10% and you get $10,000. Subtract that result from $10,000 and the amount you are able to deduct is zero. At the previous 7.5% rate, you would have been able to deduct $2,500.
There is a break for seniors, however. If you were age 65 or older before the close of the 2013 tax year, you may continue to use the 7.5% variable in the equation. This is true even if one spouse is 65 or older and the other is younger than 65. They both enjoy the lower threshold even if they file separate income tax returns.
This reprieve for seniors is only temporary. The lower threshold will last from 2013 through 2016 then revert to the 10% limitation.
If it appears that you will lose this deduction because of the higher threshold amount, there are a few steps you can take to ensure that you get some deductibility.
First of all, if you have a high-deductible insurance plan, you may qualify to open a Health Savings Account (HSA). These plans may be administered through your employer or you can check with your local bank or insurance broker to see if they have a plan you can enroll in. With an HSA, you are allowed to write off the amounts that you contribute into the account as a full deduction on your tax return. Complete IRS Form 8889 then list the contribution deduction on Line 25 under Adjustments to Income on form 1040. You simply deposit funds into the account then pay your medical, dental, and prescription bills from the account. If you pay for health supplements or any other expenses not considered valid medical expenses from this account, you must show those distributions as income on your tax return.
You may contribute $3,250 (individual plan) or $6,450 (family coverage plan) for 2013. The contribution limits increase to $3,300 or $6,550 respectively for 2014.
You can also consider bunching medical and dental expenses into one tax year. For example, say you incur a lot of medical expenses during 2014. Then in December, you find out that you need extensive medical tests or extra dental work. Be sure to incur the expense and have the work done during December 2014 in order to stack your medical deduction.
And lastly, make sure you take every medical deduction to which you are entitled. It’s important to understand the rules regarding what the IRS considers a valid medical expense.
It’s important to understand the rules regarding what the IRS considers a valid medical expense. I’m always surprised by clients who miss many of the deductions simply because they don’t understand what is allowed. For example, you may deduct alternative forms of medical treatment such as acupuncture and visits to naturopathic doctors. Hearing aids and other medical apparatus are also deductible. Don’t forget the Medicare premiums paid from your Social Security benefits as well as health insurance premiums and long term care premiums. For more information on what you can deduct, check IRS Publication 502 Medical and Dental Expenses

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