The majority of changes coming from the recently passed GOP tax reform bill won't go into effect until 2018, but there is one key exception. The bill expands the medical expense tax deduction for two years, and the expansion is retroactive to the 2017 tax year. When tax time rolls around, this change could help put more money back in the pockets of senior citizens and all Americans who paid high medical bills last year.
What is changing?
Only households with high amounts of unreimbursed medical expenses relative to their income can take the deduction. Before the passage of the tax-reform bill, only medical expenses that exceeded 10% of adjusted gross income, or AGI, qualified. The tax bill lowers the AGI threshold to 7.5%, where it stood until the 2013 tax year. It also makes the change retroactive to the 2017 tax year, meaning you can use it on the return you'll file in 2018. However, it will expire after the 2018 tax year, after which time the threshold goes back up to 10%.
If you aren't familiar, AGI is your total, or gross, income, minus certain "adjustments". Common adjustments to income include traditional IRA contributions, student loan interest, and educator classroom expenses, just to name a few.
How much could this change save you?
Here's an example of how this change could work. Let's say you're married with two children, and your AGI on your 2017 tax return is $70,000. We'll also say you paid total out-of-pocket medical costs of $8,000 for the year. (We'll get to what medical expenses qualify in the next section.)
Based on the 10% AGI threshold, you would have been able to deduct medical expenses greater than $7,000. If you had $8,000 in out-of-pocket medical expenses, you would have been entitled to a $1,000 deduction.
Under the new tax law, you can deduct medical expenses that exceed 7.5% of AGI, which translates to $5,250 in our example. Since our hypothetical couple paid $8,000 in medical expenses, they would now be entitled to a much greater deduction of $2,750.
What expenses are eligible?
The IRS has a long list of allowable medical expenses for the deduction, and my colleague Selena Maranjian published an excellent list and discussion of some of the more common ones in a 2017 overview. Just to name a few, you can consider the cost of:
- Acupuncture treatments.
- Ambulance transportation.
- Medical supplies you purchase.
- Surgical expenses.
- Expenses of installing equipment or improving your home for medical purposes -- for example, construction of an entrance ramp to your home.
- Chiropractor expenses.
- Dental expenses.
- Eye exams and related expenses such as glasses and contact lenses.
- Fertility treatments.
- Hearing aids.
- Hospital care.
- Health insurance premiums, as long as you aren't already receiving a tax credit or deduction for them. This includes Medicare premiums you pay.
- Long-term care services.
- Prescription medications.
- Nursing home care.
- Transportation costs related to receiving medical care.
There are also some common expenses that don't count, such as cosmetic surgery, over-the-counter drugs, vitamins, maternity clothes, and hair removal, just to name a few.
Whom will this change help?
Obviously, this is good news, albeit temporarily, for anyone who pays high medical bills in 2017 or 2018. This group includes a disproportionately high number of senior citizens, particularly lower-income ones, and is likely to be a major beneficiary of this change.
Seniors, as a group, have higher medical costs than the rest of the population, and until the 2016 tax year, Americans 65 and older were subject to the 7.5% AGI threshold already, although it was set to expire. The new law extends the favorable medical-expense threshold and expands it to include the entire population.
It's also worth mentioning that taxpayers need to itemize to take advantage of the medical-expense deduction. In the 2015 tax year, almost 9 million Americans used the deduction, and the figure is unlikely to change significantly for 2017. However, the new higher standard deduction kicks in for the 2018 tax year, which will probably mean many people who previously qualified for the medical-expense deduction will no longer be able to use it.
Finally, to maximize your medical tax benefits, even if you can't use the medical-expense deduction, be sure you consider a Health Savings Account (HSA) or Flexible Spending Account (FSA), which are smart ways to save money on a pre-tax basis for health expenses.
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