What Should Clients Do About Medical Deductions for COVID-19 Expenses

What if your clients have medical or related expenses due to the corona virus? Tax expert Julian Block gives practical and personal advice.

Mar 16th 2020
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Your clients likely have a myriad of tax deduction-related questions under the best of circumstances. But given the outbreak of COVID-19, some(hopefully not many) will have concerns over related medical and other expenses connected to this virus.

Our resident tax guru Julian Block offers this personal account of how he advised clients of his who had just such concerns. If you do have clients in this situatiuon, or if they want answers just in case, hopefully Julian's advice on dealing with these expenses for tax purposes will be of some comfort.

My clients include an affluent, elderly couple for the purposes of anonymity I'll call Walter and Phyllis Neff. Both have serious respiratory problems that make them susceptible to the corona virus. They could incur sizable medical expenses to avoid or alleviate the outbreak.

At a minimum, Walter and Phyllis will need to shell out for cleaning supplies, gloves, goggles, masks, and other kinds of protective equipment.  If you add in travel costs to obtain these items if there are empty shelves in near-by store, all of these outlays, will pass muster as deductible medical expenses.

Phyllis then pivots to a potentially more costly concern: They could die should they be hospitalized in a place that's likely already to be operating at peak efficiency and prioritizing treatment for the young and those with the best chance for survival. As they're unyielding in their unwillingness to risk the consequences of long waits for care, they're willing to pay for private-duty nurses. 

While I don't have to remind them that Medicare and their supplemental insurance plan don't cover those costs, I do mention that the IRS doesn't require taxpayers to select the least expensive kinds of care. Private nursing costs also qualify as deductible. Still, the potential costs could be big bucks.

The frazzled couple then ask a straightforward question: How much help can they expect from the IRS when it comes to deducting their expenditures? My two-word answer: Not much.

The hitch is that the IRS severely limits tax relief for medical expenses. It requires them to pass several tests. 

To begin with, medical expenditures can't be claimed by taxpayers who claim standard deduction amounts that they can subtract from their adjusted gross income (AGI) in lieu of itemizing deductions like charitable contributions on Form 1040's Schedule A. In short, the Neffs have to be itemizers. 

The agency also requires that the payments not be for bills that are covered by insurance, reimbursed by employers or otherwise satisfied. The big hurdle is that the expenses are allowable only to the extent that their total in any one year exceeds 7.5 percent of AGI.

Their lofty AGI of $400,000 means they forfeit any tax break for the first $30,000 of medical expenses. Another complication is that the Tax Cuts and Jobs Act abolished or curtailed some itemized deductions and greatly increased the standard deduction amounts. The legislation continues to "index" the amounts, meaning they're adjusted annually to reflect any intervening inflation.

There's a cap of $10,000 on what married persons filing jointly and single persons are able to deduct for their payments of state and local income and property taxes. It drops to $5,000 for married couples filing separate returns.

The Neffs paid off their mortgage and can't claim interest payments. While they can use Schedule A for charitable contributions, they don't. Instead, they use some of their required minimum distributions (RMDs) from IRAs to make qualified charitable distributions (QCDs is how the IRS refers to them).

Their IRA custodian sends them checks payable to the charities that they then forward to the payees. Much more on that in "Tax-Savvy Seniors Use IRA Withdrawals to Make Deductible Donations."

2020's standard  deduction amounts: $24,800 for married persons filing jointly, $18,650 for heads of household and $12,400 for single persons and married persons filing separate returns. Additional amounts for filers older than 65 (the Neffs and all other RMD recipients) as well as those who are legally blind): $1,300 for married persons filing jointly or separately and $1,650 for single persons and heads of household. The Neff's standard deduction: $27,400, comprising $24,800 for both, plus $1,300 for him and $1,300 for her.

When is itemizing worthwhile for the Neffs or any clients in a similar situation? Only if their Schedule A write-offs of $10,000, at most, for state and local taxes and medical expenses that exceed their nondeductible threshold of $30,000 surpass their standard deduction of $27,400.

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