The law makes it difficult for itemizers to deduct medical expenses. To reap any write-off, you must pay bills that aren't covered by insurance, reimbursed by employers or otherwise satisfied by, for example, a company-sponsored plan to which employees contribute pretax dollars that can be used to pay medical charges. But an understanding of the rules and the workarounds can help you maximize the deductions.
First of all, understand that for 2014, the big limitation is that those outlays are allowable only for the portion that tops 10 percent of your AGI. For individuals 65 and up, the nondeductible floor remains 7.5 percent through 2016. You stand little chance of a break at filing time for medical costs unless your reportable income is modest or you incur unusually high medical expenses—for instance, because of uninsured surgery, severe chronic disease or a catastrophic illness. Even within these restrictions, however, there are some useful strategies.
Timing payments. If you intend to claim medical expense, your tax strategy depends on how much you expect to report as AGI and the amount of medical payments that you've already made. Because deductions are allowable only for the portion of payments that exceed 10 percent (or 7.5 percent) of AGI, payments in any single year that fail to top that threshold are nondeductible. So your strategy should generally be to avoid "wasting" payments by accelerating or postponing them into one year.
Be mindful of these guidelines when payments for tax year 2014 are close to, or already over, the nondeductible floor. You can schedule many services at your convenience, such as routine dental cleanings, and physical checkups, as well as purchases of extra pairs of eyeglasses. You also can strategize when to pay for medically required home improvements, such as wider doorways to accommodate persons in wheelchairs.
To avoid the possible loss of a deduction for 2015 for those payments, and to boost your deduction for 2014, you should have the services performed and pay for them by Dec. 31 of 2014. This strategy is even more advantageous when you anticipate an increase in AGI for 2015 and, therefore, a higher threshold.
An example: For 2014 and 2015, John and Virginia Hickey anticipate an AGI of $160,000 and they intend to itemize deductions. One of them is over age 65. They expect medical payments to total $12,000 for 2014 and the same for 2015. The payments they make in 2015 include checks totaling $4,000 sent in January to take care of bills for dental work, eyeglasses or routine checkups received before 2014 ends. They consequently forego any write-offs for 2014 or 2015 because payments in both years fail to top $12,000 (7.5 percent of $160,000).
Now assume that the Hickeys date the checks no later than Dec. 31 and actually drop them in a mailbox in sufficient time for the envelopes to have been postmarked by midnight Dec. 31. That bit of forethought, which has the blessings of the IRS, converts nondeductible payments for 2015 into a $4,000 deduction for 2014. It makes no difference that the checks weren't cashed or deposited by the recipients until 2015. If the Hickeys are in a 30 percent federal and state tax bracket, a $4,000 write-off lowers 2014's tax tab by $1,200.
Credit cards. The rules are more favorable when the Hickeys use credit cards to make December payments for medical services and other deductibles such as donations. They're entitled to 2014 deductions for the amounts charged, even though they're billed for the charges after 2014 closes.
Be aware that the IRS usually disallows write-offs for payments made this year for services that won't be performed until next year by dentists, doctors, hospitals and the like. But it allows 2014 prepayments when people pay now for long-term work to be undertaken in future years—expensive, uninsured orthodontic work on children, for instance.
In figuring allowable medical expenses, the couple should remember to count payments for the care of their children, parents, and any other dependents for whom they provide more than half (more than 10 percent if they qualify under a multiple-support agreement) of the total support for the year in question. An often-overlooked opportunity is that the couple remains eligible for this break even if they're ineligible to claim an exemption for, say, Virginia's father, because his reportable income exceeds the ceiling on the income that a dependent can receive. The income cap is $3,950 for 2014, a figure that's adjusted each year for inflation.
Different rules apply if the Hickeys are divorced or legally separated. At one time, a divorced or separated parent could deduct payments for a child's medical expenses only if that parent could claim an exemption for the child. Now, however, it no longer matters whether the exemption belongs to John or Virginia. Under the current rules for divorced or separated parents, if either one claims the child, each one can deduct those medical expenses that he or she pays for the child.
About the author:
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator) and an attorney. More on this topic is available from "Julian Block's Year Round Tax Strategies," available at julianblocktaxexpert.com.