Medical expense deductions are the elusive goal of many taxpayers. With higher medical expenses than others, retirees are the taxpayers most likely to be able to deduct their medical expenses. They can maximize those deductions by knowing the rules.
The definition of deductible medical expenses is broad. Qualified medical expenses, however, can be deducted only if the taxpayer itemizes deductions on Schedule A. Those who take the standard deduction cannot separately deduct medical expenses. Even for itemizers, only medical expenses that exceed 7.5% of adjusted gross income are deducted. If AGI is $50,000, only medical expenses exceeding $3,750 are deductible. Here are some tips for maximizing tax breaks from medical expenses.
Deducting the cost of an assisted living facility is trickier, because assisted living primarily is a residential facility not a medical facility. Deductions are most limited for those who can perform at least five of the six activities of daily living (eating, toileting, transferring, bathing, dressing, and continence). These individuals deduct only the portion of the costs related to nursing care or other health care. These should be itemized in the bill.
But when the assisted living resident cannot perform two or more of the activities of daily living, the entire cost of the facility can be deducted if the resident has a plan of care in place. A plan of care can be drawn up by your physician, a nurse, or a physical therapist.
The taxpayer also might receive a bonus by being able to take a dependent exemption for the relative. To do that, the relative must have non-Social Security income less than the personal exemption amount, and there are other qualifications. Check IRS Publication 17 for details on the dependent exemption.
Suppose Rosie Profits is in a nursing home at a cost of $60,000 annually. Rosie has income from Social Security and investment income that cover most of the cost, and the rest is paid from selling investments. Deducting the cost as a medical expense wipes out her tax bill, but she was in a low tax bracket to start.
What if Rosie’s adult son, Hi, is in a higher tax bracket? The medical expense deduction is much more valuable in the higher tax bracket. In addition, the deduction of the nursing home expense should make the medical expenses of Hi’s family deductible.
Here’s how the numbers could work. Suppose Hi’s adjusted gross income is $250,000. He needs medical expenses more than $18,750 to deduct anything. If Hi pays all Rosie’s nursing home expenses, he’ll deduct $41,250. The medical expense deduction reduces Hi’s taxes by more than $16,000. It is greater if Hi has other medical expenses to deduct. Rosie could give Hi $44,000 annually to pay the nursing home expenses and still leave him whole. Rosie probably would have a tax bill of over $8,000 annually, leaving the family net savings of around $8,000 by restructuring it this way. If Hi has enough family members and Rosie makes a $12,000 gift to each of them each year, there would be no gift tax consequences. Otherwise, Rosie would need to file a gift tax return. There might not be a gift tax unless her lifetime estate and gift tax exemption already is used.
Suppose the nursing home resident cannot afford the expenses, and one child cannot afford to foot the bills. The resident has several children who together can contribute enough to pay the expenses. If they all contribute, however, no one qualifies to deduct the expenses. The solution is for the children to agree that one of them can take the deduction. If together they provide over half of the resident’s support for the year, they can designate one of them to deduct the expenses. The contributions made by the others can be adjusted to account for the tax savings received by one of them. Each of the children must sign a form that is filed with the return of the one taking the deduction. Details of how to qualify for and implement this strategy are in IRS Publications 17 and 502.