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Maximizing Medical Expense Deductions

Last update on: Oct 12 2016

Retirees and those near retirement often shortchange themselves on deductions for medical expenses. To be sure, there are obstacles to deducting medical expenses, and most taxpayers can’t clear those hurdles. Yet, many retirees are likely to qualify, and knowing all of the rules ensures you receive the maximum benefits of the law. It is more important than ever for senior Americans to know the rules, because they were tightened again this year for those 65 and older.

To deduct medical expenses, you first have to itemize expenses on Schedule A of Form 1040. Those who take the standard deduction don’t qualify. The standard deduction in 2016 is $6,300 for singles and $12,600 for married people filing jointly. If you have a mortgage, make significant charitable contributions or pay high real estate or income taxes (or a little of all of the above), you’re likely to itemize expenses.

There’s an additional hurdle. After adding all your deductible medical expenses, you subtract 10% of adjusted gross income (AGI). That’s the last line on the front page of Form 1040. Until this year, taxpayers age 65 and older would subtract only 7.5% of AGI, but the Affordable Care Act of 2010 changed it to 10% for 2017 and later years, which has been the rule for younger taxpayers for several years. Then, the remaining amount is your medical expense deduction.

Suppose Max Profits has AGI of $80,000 and $15,000 of deductible medical expenses. If Max itemizes expenses, he can deduct $7,000 of the medical expenses ($15,000 minus $8,000 (10% of $80,000)).

That 10% hurdle intimidates a lot of people. They don’t even bother to track and total their medical expenses after learning the rules. That can be a big mistake, because more expenses qualify as deductible medical expenses than many people realize. Also, even when you traditionally have low medical expenses, you never know when you might have a significant medical expense or two during the year, pushing you significantly over the 10% threshold. Then, you’ll be sorry you didn’t know the rules and track all of your medical spending.

You may deduct qualified medical expenses paid on behalf of you, your spouse, and any dependents. Only expenses not reimbursed by insurance or paid by someone else are deductible.

Qualified medical expenses are broadly defined as any expense incurred to cure or to mitigate a disease or to affect a condition of the body.

Frequently overlooked deductible expenses are medical insurance premiums, including Medicare premiums for Part B, Part C, Part D, and supplemental, or Medigap, plans. People often overlook Part B premiums because they are withheld from their Social Security benefits. For employees, their share of insurance premiums often is withheld from their paychecks.

Long-term care insurance premiums also are deductible when they are for qualified policies, up to a limit determined by the IRS each year. Your insurer can tell you if the policy is tax qualified. The current deduction limits are available in the tax return instructions and on the IRS web site at www.irs.gov.

Also deductible are co-payments or coinsurance, deductibles, and dental and vision expenses that aren’t covered by insurance (including Medicare).

Travel to receive medical care is a little-known deduction. If you drive to receive medical care, you can deduct 19 cents per mile in 2016. You also can deduct the cost of taxis, public transportation, and other costs of traveling to and from receiving medical care.

You can deduct almost any expense for a treatment or procedure provided by a licensed medical provider (not only M.D.s) that is non-cosmetic and is to cure or mitigate a disease or affect a condition of the body. See the box nearby for a list of some of the expenses that have been ruled deductible.

You might be able to deduct medical expenses paid on behalf of a relative who’s a dependent, which means you must provide over half of his or her support. The relative doesn’t have to live with you. So, if you’re helping with the medical expenses and other living expenses of a parent, sibling, or child (including in-laws and step relatives), you might be able to deduct those expenses. Check IRS Publications 17 and 502 for details. They are available free on the IRS web site at www.irs.gov.

The deductibility of long-term care expenses, such as nursing home and assisted living care, depend on the reasons for residing in the facility and the care received.

When the primary reason for residing in a nursing home is one’s physical condition and the need for readily available medical care, the entire cost of the nursing home is deductible. But if medical care is not the primary reason for residing in the nursing home, such as when the resident needs primarily custodial care (which is the usual reason for a long-term nursing home stay), only the specific costs attributable to medical and nursing care are deductible. Payments for food, lodging, and other personal expenses are not deductible in that case.

Deducting the cost of an assisted living facility is trickier. Deductions are limited the most for residents who can perform at least five of the six activities of daily living (eating, toileting, transferring, bathing, dressing, and continence). They deduct only the portion of the costs that are directly for medical care.

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 a physician, nurse or physical therapist.

In one court case, a patient was chronically ill due to dementia and her doctor believed caregivers were necessary around the clock for medical reasons as well as safety. Because the patient had a plan of care in place and her doctor believed the caregivers were medically necessary because of her diminished capacity, the Tax Court held that the payments to the caregivers were deductible as medical expenses. (Estate of Lillian Baral, 137 T.C. 1, 2011)

A long-term care provider usually itemizes bills so that you can see which expenses are for medical care and personal care.

Expenses provided by caregivers at the patient’s home, including care provided by relatives, can be deductible. The care must be medically necessary or due to medical conditions. When a relative provides the care, there must be a written agreement describing the care that will be provided and the compensation for it. The pay must be reasonable for the care provided, and the person paid must be qualified to give the care. Without a written agreement spelling out the details, the IRS will assume that a relative providing care is doing so without expectation of payment and that any payments are gifts. (Estate of Olivo v. Commissioner, T.C. Memo. 2011-163) It also is best to have a written care of plan developed by a medical professional.

In some cases, a person is able to deduct expenses he or she didn’t pay. A daughter had significant medical expenses. Her mother paid them for her. The daughter was not the mother’s dependent, so the mother couldn’t deduct them. The daughter deducted them, and the Tax Court allowed the deduction. The payments were intended as gifts to the daughter, so she was entitled to treat them the same as if she’d received a cash gift from her mother and paid the expenses. (Lang v. Commissioner, T.C. Memo 2010-286)

Families might want to use strategies such as this to ensure that someone in the family is able to deduct medical expenses.

Not all expenses related to your health or body or delivered by a licensed medical professional are qualified medical expenses. Cosmetic surgery is not deductible when it is medically unnecessary because its purpose is to improve appearance and does not treat an illness or disease or promote the proper functioning of the body. Health club dues are deductible only to the extent that they are for medically prescribed weight loss classes or another specific medical condition. Amounts paid to improve general health or relieve mental or physical discomfort not related to a particular medical condition are not deductible.

 

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