Tax Reform and the Medical Expense Deduction
posted Oct 23, 2018 by Loree Dubois, CPA in the Global Tax Blog
Medical expenses can take a hefty bite out of your budget. If you have unforeseen emergencies not covered by insurance, you can run into some significant expenses. For this reason, the IRS created the medical expense deduction, which allows you to deduct qualified medical expenses that exceed a certain percentage of your budget. Did the TCJA impact this deduction at all? Read on.
What is the medical expense deduction?
The general rules of the medical expense deduction under prior law held that:
- Taxpayers who itemized deductions could deduct qualified out-of-pocket medical expenses that were over 10% of their adjusted gross income for the year.
- Qualified expenses included expenses paid for diagnosis, cure, mitigation, treatment, or prevention of disease, including dental costs
- The costs must have been incurred for either taxpayer, the taxpayer’s spouse, or dependent.
- Taxpayers could only deduct medical expenses paid in the same tax year as the return.
What did the TCJA change?
The TCJA preserves the deduction but changes the floor from 10% adjusted gross income to 7.5% for tax years 2017 and 2018. Taxpayers can deduct qualified medical expenses that are over 7.5% of their adjusted gross income for the year (including the 2017 tax return which was due April 17th, or October 15th for extended returns). The floor will return to 10% of AGI after 2018.
What should you do to save on tax?
You might consider “bunching” expenses into 2018. Since the threshold is increasing to 10% in 2019, accelerating deductible medical expenses into 2018 might be beneficial.
Keep in mind that you have to itemize deductions to deduct medical expenses. Itemizing saves tax only if your itemized deductions exceed your standard deduction. Also, since the TCJA nearly doubled the standard deduction for 2018, many taxpayers who’ve previously itemized may no longer benefit from doing so. Check out our blog, The New Tax Law and Its Impact on Itemized Deductions for more on that.
We can help you decide if bunching expenses is the right decision for you and your family. Contact us today!
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