THE EFFECT OF THE AFFORDABLE CARE ACT ON MEDICAL EXPENSE DEDUCTIONSBondBeebe
Billy Thomas, CPA
While sifting through the details of the medicare surtaxes that took effect this year as part of the Affordable Care Act (ACA) implementation, you may have missed the ACA-mandated change to the threshold for deducting qualified, unreimbursed medical expenses.
Before 2013, taxpayers were permitted an itemized deduction for medical expenses exceeding 7.5% of their adjusted gross income (AGI); the level is 10% for those taxpayers subject to Alternative Minimum Tax (AMT). Beginning this year, the adjusted gross income floor is increased to 10% for regular and alternative minimum tax.
In other words, a taxpayer with an AGI of $100,000 will need to have out-of-pocket medical expenses in excess of $10,000 in 2013 (versus $7,500 in prior years) before he or she can claim a deduction on Schedule A.
Taxpayers age 65 or older are exempt from this increased AGI floor through 2016 and will only be subject to the 7.5% AGI floor for regular tax.
There are many ways to lessen the sting of the increased limitation for deductible medical expenses. These options involve a certain amount of foresight and planning. One such option is to plan any costly medical procedures in a year where you can pay the out-of-pocket expenses with pre-tax dollars. In order to do this, take advantage of any employer-provided cafeteria plans during the enrollment periods and/or make contributions to Health Savings Accounts (HSAs) if permitted. You can also combine medical expenses into one calendar year in order to exceed the AGI floor of 10%.
As this and other ACA-related tax provisions go into effect, ensure that you have planned ahead and are ready for how these changes will affect your taxes.