June 20, 2023
There are some potential tax benefits of either taking the medical expense deduction or paying medical expenses through a Health Savings Account (HSA), Flexible Spending Account (FSA), Archer Medical Savings Account (MSA), or Health Reimbursement Account (HRA). These accounts will typically be available to you at work, so check with your employer’s human resources department. If you are self-employed, talk to me about your options for paying medical expenses.
Medical expenses can be claimed as a deduction only to the extent your unreimbursed costs exceed 7.5% of your adjusted gross income (AGI). Medical expenses are deductible only if you itemize, which means that your itemized deductions must exceed your standard deduction. However, you can pay your medical expenses through one of the accounts in the previous paragraph regardless of income or whether you itemize.
Qualifying medical costs, which include many items other than hospital and doctor bills, often amount to a much larger figure than expected. Here are some items you should take into account in determining your medical costs:
Health insurance premiums. The cost of health insurance is a medical expense. This item, by itself, can total thousands of dollars a year. Even if your employer provides you with health coverage, you can deduct the portion of the premiums that you pay. Long-term care insurance premiums are also included in medical expenses, subject to specific dollar limits based on age.
Transportation. The cost of getting to and from medical treatment is a medical expense. This includes taxi fares, public transportation, or the cost of using your own car. Car costs can be calculated at 22¢ a mile for miles driven in 2023, plus tolls and parking. Alternatively, you can deduct your actual costs, such as for gas and oil, but not your general costs such as insurance, depreciation, or maintenance.
Therapists, nurses, etc. Services provided by individuals other than physicians can qualify as long as they relate to a medical condition and aren’t for general health. For example, costs of physical therapy after knee surgery would qualify, but not costs of a fitness counselor to tone you up. Amounts paid to a psychologist to treat a diagnosed medical illness are deductible medical expenses, but an amount paid for marital counseling is not. Amounts paid for certain long-term care services required by a chronically ill individual also qualify as deductible medical expenses.
Physical exams. The cost of a physical exam is a medical expense, because it provides a diagnosis of whether a disease or illness is present.
Eyeglasses, hearing aids, dental work. Deductible medical expenses include the cost of eye exams, glasses or contact lenses, hearing aids, dental exams and dental work (but not tooth whitening), and other ongoing expenses in connection with medical needs. Purely cosmetic expenses don’t qualify, but certain medically necessary cosmetic surgery is deductible.
Prescription and nonprescription drugs. Prescription drugs (including insulin) may be deducted or reimbursed under one of the health plans. Different rules apply to nonprescription drugs, such as aspirin. These don’t qualify for the deduction even if a physician recommends their use. However, both prescription and nonprescription drugs may be paid or reimbursed through an HSA, HRA, Archer MSA, or medical FSA.
Drug-abuse, alcoholism, and smoking-cessation programs. The costs of programs to treat alcoholism or drug addiction are deductible expenses because the programs treat a disease (substance abuse disorder). Amounts paid for participation in a smoking-cessation program and for prescribed drugs designed to alleviate nicotine withdrawal are deductible medical expenses. However, non-prescription nicotine gum and certain nicotine patches aren’t deductible.
Weight-loss and nutrition expenses. A weight-loss program is a deductible medical expense if undertaken as treatment for a disease diagnosed by a physician. The disease can be obesity itself or another disease, such as hypertension or heart disease, for which the doctor directs you to lose weight. It’s a good idea to get a written diagnosis before starting the program. Deductible expenses include fees paid to join the program and to attend periodic meetings.
Food or beverages purchased for weight loss or other health reasons are deductible only if all of the following are true: (1) the food or beverage does not satisfy normal nutritional needs, (2) the food or beverage alleviates or treats an illness, and (3) the need for the food or beverage is substantiated by a physician. The deductible (or reimbursable) medical expense is limited to the amount by which the cost of the food or beverage exceeds the cost of a product that satisfies normal nutritional needs. However, the cost of low-calorie food that you eat in place of your regular diet isn’t deductible.
The costs of nutritional supplements are a medical expense only if the supplements are recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician. Otherwise, the cost of nutritional supplements is not a medical expense.
General health improvements/gym memberships. The costs of exercise for general health improvement are not health expenses, even if recommended by a doctor.
However, a gym membership may be a medical expense if the membership was purchased for the sole purpose of affecting a structure or function of the body (such as a prescribed plan for physical therapy to treat an injury) or the sole purpose of treating a specific disease diagnosed by a physician (such as obesity, hypertension, or heart disease). Otherwise, the cost of a gym membership is for the general health of the individual and is not a medical expense.
Dependents and others. You can deduct the medical costs that you pay for your dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for an individual, such as an elderly parent or grandparent, who would qualify as your dependent except that he or she has too much gross income or files jointly. In most cases, the medical costs of a child of divorced parents can be claimed by the parent who pays them, regardless of who gets the dependency exemption.
Illegal expenses. Amounts paid for operations or treatments that are illegal under federal law (such as marijuana) are not medical expenses, even if permitted under state law.
Overall, medical costs are broadly defined for deduction and reimbursement purposes. If any of these examples apply to you, please contact us. We want you to get every deduction for which you are eligible.
June 22, 2023
Have you ever wondered how social security benefits fit into your taxes? How much they are taxed, or whether they are taxed at all, depends on your other income. In the worst-case scenario, 85% of your benefits would be taxed. (This doesn’t mean you pay 85% of your benefits back to the government in taxes—merely that you would include 85% of them in your income subject to your regular tax rates.)
To determine how much of your benefits are taxed, you must first determine your other income, including certain items otherwise excluded for tax purposes (for example, tax-exempt interest). Add to that the income of your spouse, if you file jointly. To this add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your total income plus half of your benefits. Now apply the following rules:
For married taxpayers, filing jointly:
1. If your income plus half your benefits is not above $32,000, none of your benefits are taxed.
2. If your income plus half your benefits exceeds $32,000 but is not more than $44,000, you will be taxed on (1) one half of the excess over $32,000, or (2) one half of the benefits, whichever is lower.
Example (1): S and D have $20,000 in taxable dividends, $2,400 of tax-exempt interest, and combined Social Security benefits of $21,000. So, their income plus half their benefits is $32,900 ($20,000 plus $2,400 plus 1/2 of $21,000). They must include $450 of the benefits in gross income (1/2 ($32,900 − $32,000)). (If their combined Social Security benefits were $5,000, and their income plus half their benefits were $40,000, they would include $2,500 of the benefits in income: 1/2 ($40,000 − $32,000) equals $4,000, but 1/2 the $5,000 of benefits ($2,500) is lower, and the lower figure is used.)
For single taxpayers:
1. If your income plus half your benefits is not above $25,000, none of your benefits are taxed.
2. If your income plus half your benefits exceeds $25,000 but is not more than $34,000, you will be taxed on (1) one half of the excess over $25,000, or (2) one half of the benefits, whichever is lower.
Example (1A): S has $20,000 in taxable dividends, $2,400 of tax-exempt interest, and Social Security benefits of $9,000. So, S’s income plus half S’s benefits is $26,900 ($20,000 plus $2,400 plus 1/2 of $9,000). S must include $950 of the benefits in gross income (1/2 ($26,900 − $25,000)). (If S’s Social Security benefits were $3,000, and S’s income plus half S’s benefits were $30,000, S would include $1,500 of the benefits in income: 1/2 ($30,000 − $25,000) equals $2,500, but 1/2 the $3,000 of benefits ($1,500) is lower, and the lower figure is used.)]
For either married or single taxpayers:
In many cases, If your income, plus half your benefits exceeds the limits listed above ($44,000 for married, or $34,000 for single taxpayers], the computation grows far more complex. Generally, however, unless your income plus half your benefits is fairly close to $44,000 [$34,000 for single taxpayers], if you fall into this category, 85% of your Social Security benefits will be taxed.
Caution: If you aren’t paying tax on your Social Security benefits now because your income is below the above floor, or are paying tax on only 50% of those benefits, an unplanned increase in your income can have a triple tax cost. You’ll have to pay tax (of course) on the additional income, you’ll also have to pay tax on (or on more of) your Social Security benefits (since the higher your income the more of your Social Security benefits that are taxed), and you may get pushed into a higher marginal tax bracket. This situation might arise, for example, when you receive a large distribution from a retirement plan (such as an IRA) during the year or have large capital gains. Careful planning might be able to avoid this stiff tax result. For example, it may be possible to spread the additional income over more than one year, or liquidate assets other than an IRA account, such as stock showing only a small gain or stock whose gain can be offset by a capital loss on other shares. If you expect a large increase in your income, or you should need a large amount of cash for a specific purpose, please contact us before liquidating any assets. We can determine just what your additional tax cost will be and potentially reduce this cost with some planning.
If you know your social security benefits will be taxed, you can voluntarily arrange to have the tax withheld from the payments by filing a Form W-4V. Otherwise, you may have to make estimated tax payments.
If you’d like us to run some specific numbers for you, or if you would like to discuss this matter further, please call.
