For those who have out-of-pocket medical and dental expenses, the Tax Cuts and Jobs Act could provide an unexpected tax break. Proposals in the House of Representatives in late 2017 called for a repeal of medical expense deductions entirely, as part of reform to curtail itemized deductions. After negotiations, the medical expense deduction was actually temporarily expanded, not repealed. The final law created a window where it may be modestly easier to claim medical deductions for the 2017 and 2018 tax years.
There has been a threshold that medical expenses need to exceed before they become deductible. Rules on the books prior to tax reform required medical expenses to exceed 10% of adjusted gross income (AGI) for 2017. The new tax bill lowers the threshold for deducting those expenses to 7.5% of AGI. However, the lower threshold only applies for 2017 and 2018. It then reverts to 10%.
Take a household with $100,000 adjusted gross income and $10,001 out of pocket medical expenses. For 2017 and 2018, that household would be able to include $2,501 of deductible expenses in itemized deductions, based on the 7.5% AGI threshold. After 2018, that same household would have only $1 deductible medical expenses.
How to Make the Most of it
As the law was passed late in 2017, the timing provided little to no opportunity for planning medical expenses for the 2017 tax year. Still, the revision may be good reason to confirm with a tax advisor if you should go over records with more scrutiny to determine your eligibility.
The rule change could be motivation to accelerate costs into 2018 if it means capturing a deduction that may not be available afterwards. This may be difficult to implement given the uncertainty of medical events, but one may consider diagnostic procedures, medical devices, eye-glasses and dental work in addition to any elective surgeries.
For those with children, costs for dependents may count as well. IRS Publication 502 has an extensive list of items that you may include as a deduction. One overlooked example is certain capital expenses spent on a residence to accommodate a medical need. Those who have long-term care insurance should also remind their tax preparers of those premiums, as a portion of the cost could be deductible.
Costs reimbursed by insurance or other sources normally do not qualify for a deduction and you cannot claim a deduction for an expense paid with funds from a Health Savings Account (HSA) or Flexible Spending Account (FSA). For those who have employer provided benefits, HSA or FSA options are potentially powerful tools for lowering taxation and managing medical costs. If you have not reviewed your benefits in this area with your advisor, please bring this to our attention for discussion in addition to any other medical expense funding concerns.