With healthcare being an important topic in people’s lives, it’s important to know everything possible about medical expense deductions. When certain medical services are not covered under your health insurance plan, the good news is that they may be deductible on your federal income tax return. However, with the implementation of the Affordable Care Act, there may be a limit on the amount of medical expense deductions that may be available to you. To gain a greater understanding of how this process plays out, here are some of the most important factors.
Medical and Dental Expenses
By offering taxpayers the choice of taking standard deductions or itemizing, the IRS actually allows for a limited amount of flexibility regarding these expenses. For those who choose to itemize, it’s best to use Form 1040, Schedule A. However, even though the IRS definition of medical and dental expenses is quite broad, it does not include veterinary costs or those for non-prescription drugs. But it does include such expenses as health insurance premiums, lab fees, prescription drugs, and out-of-pocket expenses for visiting doctors, dentists, chiropractors, optometrists, and other healthcare professionals.
Adjusted Gross Income
One of the most important changes made by the IRS regarding medical expense deductions involves the calculation of Adjusted Gross Income. When doing so, you’ll be able to determine if you will come out ahead by itemizing deductions. By factoring in such allowable deductions as paid alimony, contributions to a Health Savings Account, retirement contributions, and self-employment tax, you will discover how much if any you can save on your taxes. This is due to the changes made by the IRS after 2013, when the amount of excess Adjusted Gross Income that could be deducted rose from 7.5 percent to 10 percent. While this sounds like a positive change, the reality is that most taxpayers can now actually deduct a lesser amount of medical expenses on their returns. For example, a person with an Adjusted Gross Income of $100,000 in 2013 could deduct $4,500 in qualifying medical expenses, but today could deduct only $2,000. Because of this, it’s crucial to calculate your deductions very carefully to determine the best course of action.
Premium Tax Credit
The tax subsidy associated with the Affordable Care Act, the Premium Tax Credit benefits taxpayers who join the Health Insurance Marketplace by allowing them to pay lower insurance premiums, making their insurance affordable. However, it’s important to remember that the amount of the subsidy is based upon the income you expect to make during the year. Because of this, it may be necessary to adjust at year’s end, since there may be a difference between your actual income and that which you first projected. To take full advantage of the subsidy, you can enter a tax credit on your return.
While there are many different paths you may take when determining your medical expense deductions, the good news is that by thoroughly researching your options, you may experience a pleasant surprise on your next tax return.