Among the types of expenses that are allowed to be deducted from your income is expenses that you’ve paid for medical insurance, medical care, and certain other expenses. This can get a bit complicated to understand what expenses are deductible, and the IRS recently issued a Tax Tip that will help you to understand how it all works. The complete text of IRS Tax Tip 2013-25 is listed below.
Seven Important Tax Facts about Medical and Dental Expenses
If you paid for medical or dental expenses in 2012, you may be able to get a tax deduction for costs not covered by insurance. The IRS wants you to know these seven facts about claiming the medical and dental expense deduction.
- You must itemize. You can only claim medical and dental expenses for costs not covered by insurance if you itemize deductions on your tax return. You cannot claim medical and dental expenses if you take the standard deduction*.
- Deduction is limited. You can deduct medical and dental expenses that are more than 7.5 percent of your adjusted gross income.
- Expenses paid in 2012. You can include medical and dental costs that you paid in 2012, even if you received the services in a previous year. Keep good records to show the amount that you paid.
- Qualifying expenses. You may include most medical or dental costs that you paid for yourself, your spouse and your dependents. Some exceptions and special rules apply. Visit IRS.gov for more details.
- Costs to include. You can normally claim the costs of diagnosing, treating, easing or preventing disease. The costs of prescription drugs and insulin qualify. The cost of medical, dental and some long-term care insurance also qualify.
- Travel is included. You may be able to claim the cost of travel to obtain medical care. That includes the cost of public transportation or an ambulance as well as tolls and parking fees. If you use your car for medical travel, you can deduct the actual costs, including gas and oil. Instead of deducting the actual costs, you can deduct the standard mileage rate for medical travel, which is 23 cents per mile for 2012.
- No double benefit. Funds from Health Savings Accounts or Flexible Spending Arrangements used to pay for medical or dental costs are usually tax-free. Therefore, you cannot deduct expenses paid with funds from those plans.
You’ll find more information in IRS Publication 502, Medical and Dental Expenses. Also see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. They are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
* jb Note: Even though you may not have enough medical expenses and other itemized deductions to claim them, the Standard Deduction takes the place of those itemized deductions. In other words, with the Standard Deduction you get a deduction from income that is greater than the amount of your itemized deductions. If it wasn’t for the Standard Deduction – if you had to itemize what deductions you have – you would likely have to pay more tax if you had fewer deductions than the Standard.
Sterling Raskie, MSFS, CFP®, ChFC®
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The PPACA has been affirmed by our Supreme Court. This legislation will have some tax impacts for many tax payers. Perhaps the one item that will impact the largest number of tax payers is the change for the Medical Care Deduction limit.
When we itemize our medical expenses we can deduct the amount that exceeds 7 ½% of our AGI. Beginning in 2013, the PPACA will have an impact on the amount of medical expenses we can deduct on our 1040 Schedule A.
Beginning with the 2013 tax year, the threshold limit will increase from 7 ½% to 10% of your AGI. If you have an AGI of $100,000 and deductible medical expenses of $15,000 – in 2012 this would result in your medical deduction of $7,500. ($100,000 * 7 1/2% = $7,500 Threshold. Expenses of $15,000 – $7,500 = $7,500 deduction)
With the same AGI and the same amount of medical expenses, in 2013 this legislation will reduce your medical deduction to $5,000 ($100,000 * 10% = $10,000 Threshold. Expenses of $15,000 – $10,000 = $5,000 Deduction.)
The reduced deduction will increase your income tax bill, and could possibly move you into the next higher income tax bracket.
In 2013, this change will affect those tax filers that are less than 65 years old. Those that are over 65 will have a reprieve until tax year 2017.
Thanks for the excellent explanation, Clyde.
We definitely have some changes to get used to for 2013’s new limits.