Thursday, November 15, 2012
LOCK IN 2012 MEDICAL DEDUCTIONS
As you probably already know, medical expenses can be deducted on Schedule A of your 2012 Form 1040 only to the extent that the total allowable expenses for the year exceed 7½% of your Adjusted Gross Income (AGI). If your AGI is $70,000 and your medical expenses total $6,000 you get a tax deduction of $750. If your expenses total $5,000 you get no tax benefit.
But did you know that beginning with tax year 2013 the AGI exclusion increases to 10% for taxpayers under age 65? In the above example there would be no tax deduction if your total expenses for 2013 totaled $6,000. Taxpayers age 65 and older can continue to use the 7½% exclusion rate through tax year 2016.
The increase comes via the Patient Protection and Affordable Care Act signed into law in March of 2010.
If you expect to be able to itemize on your 2012 Form 1040 here is what you should do. Sit down and estimate what your AGI will be for 2012. Then add up all of your qualified medical expenses to date. If your expenses come close to, or already exceed, the projected 7½% of AGI exclusion you should incur as many allowable medical expenses between now and the end of December.
Schedule medical and dental check-ups and procedures, renew prescriptions, purchase medical supplies, pre-pay related insurance premiums, and pay any outstanding balances. If you do not have the cash available to pay for the accelerated medical expenses you can charge them to a bank credit card.
When adding up medical costs be sure to include travel to and from doctors, dentists, therapists, treatments, etc., using the standard mileage allowance of 23 cents per mile if you drive.
The increasing AGI limitation on medical deductions makes it even more important to seriously consider participating in an employer-sponsored medical Flexible Spending Account. FSA contributions effectively provide an “above-the-line” income tax deduction for qualified medical expenses from dollar one. And they can reduce your Social Security and Medicare tax liability as well.
Unfortunately, also thanks to the healthcare reform Act, effective with tax year 2013 you will be able to put aside only $2,500 per year, indexed annually for inflation, in a Flexible Spending Account.
One caveat – under the Alternative Minimum Tax medical expenses are already subject to a 10% of AGI exclusion.