By Ken Berry
This is the eighth article in our series of tax return tips for 2011 returns.
It's often difficult for taxpayers to qualify for medical expense deductions – but not impossible. Although the annual threshold is daunting, clients often overlook or ignore deductible expenses that can help pad their total. A prime example: medical expenses paid on behalf of a relative who isn't a tax dependent.
Let's start with this basic premise. On 2011 returns, a taxpayer can deduct only those qualified medical and dental expenses in excess of 7.5 percent of adjusted gross income (AGI). For instance, if the taxpayer has an AGI of $100,000 and incurred $7,000 of unreimbursed expenses during the year, he or she gets no medical deduction. Even worse, the threshold is scheduled to rise to 10 percent of AGI in 2013.
Of course, tax filers can count the medical and dental expenses paid on behalf of a spouse or dependents, like young children, in their grand total. What about an elderly relative a taxpayer helps support?
On 2011 returns, a taxpayer can deduct only those qualified medical and dental expenses in excess of 7.5 percent of AGI. Even worse, the threshold is scheduled to rise to 10 percent in 2013.
Usually, you can claim a dependency exemption for a relative only if you provide more than half of the relative's annual support and his or her gross income doesn't exceed the personal exemption amount ($3,700 for 2011). But there's a slight wrinkle in these rules for "medical dependents." The IRS says in Pub. 502, Medical and Dental Expenses, that you can include medical expenses paid for the relative if you pass the half-support test – even if you can't claim the relative as a dependent because of the gross income test.
Example: Suppose a client's elderly mother received $10,000 in Social Security benefits and $4,500 of taxable investment income in 2011. The client gave mom $1,000 a month for rent and also paid $3,000 of her out-of-pocket medical bills. So the client provided more than half of her support ($15,000 versus $14,500). But the client still can't claim mom as a dependent for 2011 because her taxable income exceeded the $3,700 limit.
In this case, your client can add the $3,000 paid for mom's medical bills to his or her other qualified medical and dental expenses. The extra amount might be just what the client needs to surpass the 7.5 percent of AGI threshold. And, if the client already qualified for a medical deduction in 2011, the entire annual medical payment for mom is deductible.