Squaring up with the IRS
As is always the case with making choices in applying tax rules and regulations, specific facts and circumstances must be considered. This article is not intended to provide tax advice, planning or guidance. Competent professional advice should be obtained before completing your return.
What are deductible federal medical expenses?
Medical expenses incurred by an individual tax filer in the current tax year which are not reimbursed by any source are allowed as an itemized deduction on Schedule A for costs in connection with the:
Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.
Medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract.” (IRS publication 17 (PDF) Chapter 17, What Are Medical Expenses)
The IRS provides a checklist of includable/non-includable expenses on page 147 of this publication.
The state of Michigan gives no consideration in preparing individual income tax returns to medical expenses.
The small print and the planning opportunities
Two things to keep in mind:
- Only those taxpayers who itemize deductions on Schedule A of their return can take medical deductions
- Only the annual costs exceeding a certain floor are allowed to be deducted
If you take the standard deduction, you are not allowed the medical deduction. Beginning in 2013, the floor is 10% of the Adjusted Gross Income (AGI) of taxpayers who are under age 65 at the end of the year. Taxpayers or their spouses who turn 65 during the tax year or are older than 65 are allowed to use the previously allowed floor of 7.5% until 2016. AGI is the sum of all taxable income less allowed adjustments. It’s the last number appearing on page 1 of your tax return.
The deduction is allowed for the medical expense of taxpayer, the spouse, if filing jointly, and qualifying dependents. It is important to note that the medical expense dependency qualifiers are distinct and happily, more broad than the dependency qualifiers used to determine if a taxpayer can claim 2013’s $3,900 dependency exemption for a person. Under these rules, it is possible that you may deduct medical expenses paid by you for a parent or other relatives even though the parent or relative is not claimed as a dependent on your federal income tax return. See pages 142 - 147 of Pub 17 for qualifiers and more.
The medical expense deduction is based on when the payment was made, not when the service was provided if cash/debit card, a check or an on-line/phone payment method is used. Credit card payments are deductible on the date the charge is made without regard to when the card is paid. Expenses incurred before the taxpayer’s death can either be deducted on the decedent’s final income tax return or on the estate tax return provided the expense is paid within one year after the date of death and a statement is included with the decedent’s final return (or amended return) attesting to the fact that these expenses were not nor will they be claimed on the estate’s return.
Bunching of expenses into one year or deferring them into another may be advisable to take advantage of the deductible floor in one or the other. Careful consideration of the rules regarding the deductibility of expenses you paid for persons who qualify as medical dependents but not claimed as dependents on page 2 of your return can result in allowable medical deductions. The source of your payments of the expenses of medical dependents can include gifts, subject to gift tax rules, from the medical dependent.
Also, since the floor is dependent upon the AGI as shown on the return as filed, married taxpayers might do well to consider filing separately to split the joint AGI when one spouse has significant expenses that may be lost when the AGI of both are used in the calculation of the floor. Specific rules apply to payments from joint accounts and in community property state filers which are detailed on page 142 of Pub 17. Of course, significant other considerations must be taken into account before deciding on your optimal filing status.
Single persons may claim Head of Household status with its lower tax rates for a dependent parent even if the parent does not live with you but meets the requirements of this filing status. See pages 24 of Publication 17, "Who Is a Qualifying Person Qualifying You To File as Head of Household."
The IRS devotes an entire publication -- Pub 502 (PDF) -- to Medical and Dental expenses. It and the 2013 issue of Publication 17 (PDF), Your Federal Income Tax For Individuals, are available for more information.
I recommend you discuss the deductibility of medical expenses and the tax planning opportunities available with a competent tax advisor before completing your return.
Jim Palazzolo is the managing member of james thomas palazzolo, cpa, plc based in Ann Arbor Michigan. He has happily provided tax planning, preparation and IRS related services as well as accounting services since 1987 for local and global customers.
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