Typically, the fourth quarter lends itself to tax planning. This year is no different but perhaps even more important for those age 65 and over.
Seniors need to pay special attention to tracking their medical expenses for 2016. Beginning in 2017, medical deductions will need to be over 10% of Adjusted Gross Income (AGI) to qualify as a deductible on Schedule A of your federal income tax return. The current AGI floor is only 7.5%.
For those under the age of 65, the increase to 10% went into effect in 2013 as part of the rules under the Patient Protection and Affordable Care Act of 2010. Keeping track of medical expenses can be cumbersome. However, the benefit of keeping track of all those receipts can potentially save you money on your tax return.
Example of Medical Deductions for 2016 to 2017
For 2016, if your AGI is $100,000, only your medical expenses over $7,500 can be deducted on Schedule A. If total medical expenses are $10,000 then $2,500 can be deducted.
Fast forward to 2017, when the 10% floor takes effect, there will be no eligible part of your $10,000 in medical expenses to deduct.
If you are on the fence about when to incur various medical expenses, consider batching them together every other year so that you have enough to reach the floor limit. Since this year the floor is much lower than it will be in the future consider reevaluating your medical costs this year.
You may think this is a high threshold to exceed but remember that all premiums are included in your medical expenses. This includes Medicare Premiums for Part A, Part B, Part C (Advantage Plans) and Part D (prescription drugs) deducted from your Social Security benefit or paid out of pocket. It also includes Long Term Care Premiums (within the annual limits) and any other premiums for supplemental insurance. For 2016, the annual Long Term Care limit per person is $3,900 for age 60 to age 70 and $4,870 for those over age 70.
Medical care expenses, as defined by the IRS in Topic 502, include payments for the diagnosis, cure, mitigation, treatment or prevention of disease or payments for treatments affecting any structure or function of the body. Below is a list of some commonly missed deductions:
- Dental Expenses including a routine exam and cleaning
- False Teeth
- Hearing Aids
- Eye Glasses or Contact Lenses including your Eye exam
- Eye surgery for nearsightedness such as Lasik and Radial Keratotomy
- Ambulance Service
- Cost of in home pool for prescribed therapeutic reason
- Cost of in home elevator, stair lift, or ramps if needed
- Drug and alcohol addiction programs
- Participation in a Smoking Cessation program
- Prescription drugs to alleviate nicotine withdrawal
- Payments for a weight loss program for a specific disease
- Medical mileage at 19 cents per mile for 2016
Note: All expenses should be out of pocket expenses and should not be expense you paid with pre-tax dollars
For a complete list of medical deductions visit https://www.irs.gov/publications/p502/ar02.html