Staying on top of the Medical Expense Deduction
Along with charitable contributions, state tax expense, mortgage interest, and real estate tax, many folks have been able to include a little something for medical expenses on their Schedule A: Itemized Deductions, but this is changing.
Here’s how it used to work: figure out your Adjusted Gross Income(AGI), take 7.5% of your AGI, and any medical expenses in excess of this amount get included with your itemized deductions. Basically, this meant that the government figured you should be able to afford to spend up to 7.5% of your available income on medical expenses, and anything beyond that merited special consideration, namely, a tax deduction.
The change? Beginning this year, 2016, the amount you are expected to be able to afford goes up to 10%…for everyone. Even people over 65. (Seniors had been allowed a 3 year grace period at 7.5%.)
Here’s an example: Let’s say your AGI is $100,000.
- OLD: 7.5% of $100,000 is $7500. You needed to spend $7501 for medical reasons in order to get $1 in medical deduction because the first $7500 didn’t count.
- NEW: 10% of $100,000 is $10,000. Now, you won’t get a medical deduction until you spend $10,001 because the first $10,000 won’t count.
In order to be an allowable medical expense, the money must be paid by YOU, not by your insurance or your employer. Allowable medical expenses can be for pretty much anyone you are including as a dependent on your tax return. That is, you can’t include the cost of Grandma’s cholesterol medication unless she is your dependent, and Grandma can’t include it if you paid for it.
Keeping track of all of this can be difficult. To make it easier, stick with one pharmacy. Your pharmacy can print you out a list of your prescription expenses for the entire year. Call them in January and ask. Voila! No more searching through receipts, cutting those awkward bags, or trying to read the memo on your teeny tiny check copies.
Luckily, for folks here in NJ, the NJ threshold is staying the same: 2% of your NJ AGI!
There is a lot more to consider – especially as regards the types of expenses that are allowed. However, there isn’t enough room in one blog to cover it all. If you just can’t wait for a follow up piece, call and we can go over the details with you.