National Tax Director Rojas & Associates
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Medical Expense Planning in 2021

For many years, medical expenses were an itemized deduction to the extent they exceeded 10 percent of adjusted gross income.  The deduction floor has been 7.5 percent since 2017, a rule recently made permanent by the signing of the Consolidated Appropriations Act 2021 on December 27, 2020.  

Jan 11th 2021
National Tax Director Rojas & Associates
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The topic is more important for many families given our recent pandemic. What is included in medical deductions?  Following is a brief refresher, overview:

  • prescriptions, doctor bills, including psychiatrists, – as reduced by insurance coverage
  • medical insurance premiums - the self-employed individual with profits usually gets an above-the-line, non-medical deduction for such insurance
  • long-term care insurance premiums may also qualify subject to limits based on age (see Rev. Proc. 2019-44 for 2020 rules, Rev. Proc. 2020-45 for 2021 rules)
  • organ donation and transplants
  • dental fees, false teeth, hearing aids, glasses
  • transportation for medical care – medical mileage rate is $0.17 in 2020, $0.16 in 2021
  • in-home nursing care as well as hospital care

Lodging to access medical care can generally qualify subject to certain rules as well (See “Lodging,” in IRS Pub. 505 (2019), “Medical and Dental Expenses,” p. 10). So, what’s not included in medical?

  • funeral or burial expenses (though, some estate tax relief may be available)
  • veterinary expenses of pets
  • nonprescription medicines
  • trips to relax because the doctor encouraged rest
  • babysitter/childcare fees

Gym fees are also not deductible, but separate fees at the gym for weight loss are deductible (IRS Pub. 505 (2019), “Medical and Dental Expenses,” p. 14).

While meals at the hospital are medical, those that aren’t related to in-patient care don’t qualify (Ibid, p. 11).  What’s more, if you’re a bodybuilder eating special food, there’s still no medical or business expense deduction (Wheir, TC Summary Opinion 2004-117).

We write in the early months of 2021, but it is not too early to consider medical cost planning; e.g., having that surgery anticipating it will yield incremental medical deductions within a year in which itemizing is anticipated. Itemizing in alternate years, using the standard deduction every other year, is a common tax strategy.  

Medical expense planning can play a part in such planning, albeit medical expenditures are usually a matter of immediate need rather than tax planning. For tax savings, itemized deductions need to exceed the standard deduction, which is much higher following the Tax Cuts and Jobs Act of 2017. 

For 2021, the standard deduction is $12,550 for singles and married couples filing separately. Then it’s $25,100 on joint returns and $18,800 for heads of household.  

Tax savings on itemized deductions, including any discretionary medical, would consider the taxpayer’s marginal tax rate on itemized deductions in excess of the standard deduction. The 20 percent of business income deduction does not reduce adjusted gross income, so it does not affect the medical itemized deduction.  

The 20 percent deduction looks to the lesser of qualified business income or taxable income minus net capital gain, so it is possible that medical and other itemized deductions will impact the measurement of the 20 percent of business income deduction. Consider also any incremental state tax savings, weighing what are sometimes unique state rules. The dependent’s medical expenses, when paid by the taxpayer, also qualify.

In June of 2020, the IRS proposed regulations addressing direct primary care arrangements and health care sharing ministry memberships as medical expenses.  See IR-2020-116, which includes the following, as well as the proposed regulations effective date:

Payments for DPC arrangements are expenses for medical care under section 213 of the Code. Because these payments are for medical care, a health reimbursement arrangement (HRA) provided by an employer generally may reimburse an employee for DPC arrangement payments.

Payments for membership in a HCSM are expenses for medical care under section 213 of the Code. Because these payments are for medical care, an HRA provided by an employer generally may reimburse an employee for HCSM membership payments.

Expenses paid from a health savings account or flexible spending account wouldn’t qualify for the medical deduction.

In conclusion, medical expenses are still an important consideration in planning itemized deductions. The importance of planning medical deductions is enhanced in that medical is now permanently deductible when in excess of 7.5 percent of the taxpayer’s adjusted gross income.

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By joelis
Jan 13th 2021 18:36

IR-2020-116, related to HCSMs, was not finalized and is unlikely to be finalized under the new administration.
Therefore, it would not be advisable to counsel people that payments for membership in a HCSM are expenses for medical care under section 213 or that an HRA provided by an employer generally may reimburse an employee for HCSM membership payments. I'm concerned that some of these employers of the million+ members of these ministries are going to try to take a tax advantage that is not actually available.

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