Thursday, March 28, 2013

Itemized Deductions for Medical Expenses

Did you know that, not only are our health insurance costs going up, but also, the threshold for itemizing deductions related to medical expenses is going up to 10%. It has been 7.5% in prior tax years, but for tax years beginning in 2013, the threshold moves up to 10% of adjusted gross income.

Here are some example calculations for $10,000 in medical expenses:

Adjusted                                                     Amount that       Tax
Gross Income          10% Threshold        exceeds 10%       Deduction

$  50,000                   $  5,000                     $  5,000                $ 750
$  75,000                   $  7,500                     $  2,500                $ 625
$100,000                   $10,000                     $         0                $     0

Depending on your zip code, a typical health insurance policy for a family can be around $10,000 per year or more. My first question is how can a family making $50,000 a year pay for that? Assuming they can pay the $10,000, then they would be able to add $5,000 onto Schedule A. In a 15% tax bracket, this means that they would only knock off $750 from their tax due. In this example, this makes their health insurance costs $9,250 instead of $10,000. They still cannot afford this insurance, in my opinion.

If you have $100,000 in adjusted gross income, then you will not be able to meet the 10% threshold requirement since the cost of the health insurance is $10,000. No tax reduction for anyone over $100,000 in AGI basically.

The people over age 65 will not get this 10% threshold until 2017. They get a break for now. I would say the AARP was successful in their lobbying effort in getting this loophole. Remember, the AARP came out in support of the Affordable Care Act. I suppose that it would not take a smart person to figure out that this was one of the things they lobbied for during the legislative process.

The end result is the medical costs are increasing and tax deductions are disappearing. This is why I said, be prepared for changes to the Affordable Care Act.

My advice is instead of funding your IRA or Roth IRA, fund your Health Savings Account and get as high of a deductible as you can on your health insurance policy.