The Tax Cuts and Jobs act went into effect on January 1, 2018. The new tax law has a significant impact on taxpayers' ability to deduct their medical expenses.
In theory, such expenses remain deductible. Yet, the changes make it much harder for most taxpayers to deduct medical expenses. There are two reasons for this:
The new law makes it harder to itemize your personal deductions, and
Only a portion of medical expenses are deductible
You must itemize your personal deductions to deduct medical expenses
You can deduct your medical expenses only if you itemize your personal deductions on IRS Schedule A. When you take the standard deduction you reduce your income by a fixed amount. Otherwise, you itemize by subtracting your medical expenses and other deductible personal expenses from your income.
For 2018, the TCJA has almost doubled the standard deduction over the prior law to $12,000 for single taxpayers and $24,000 for married couples filing jointly. This means you have to have a lot of personal deductions to itemize.
In the past, about 30 percent of all taxpayers itemized their personal deductions. It's expected that no more than 10 percent of taxpayers will itemize after the new tax law. Far fewer taxpayers will be able to deduct their medical expenses.
To figure out whether you can itemize you need to add up all your deductible personal deductions. These include not just your medical expenses over the percentage threshold discussed below, but also:
Charitable contributions
Up to $10,000 in state and local taxes
Home mortgage interest
Casualty and theft losses due to a federally declared disaster
Gambling losses (up to gambling winnings)
Unfortunately, the new tax law eliminated many personal expenses that used to be deductible. This makes it even harder to itemize. These include:
Together, your deductible personal expenses should add up to more than $12,000 if you're single for you to itemize. That number is $24,000 if you're married filing jointly.
If your itemized deductions totals, you should take the standard deduction, which means you get no deduction for any of these expenses.
The other major impediment to deducting medical expenses is that the entire amount is not deductible, even if you itemize. You can deduct only the amount of your medical expenses that are more than a specified percentage of your adjusted gross income (AGI).
Your AGI is your total taxable income, minus deductions for retirement contributions and one-half of your self-employment taxes (if any). Plus, a few other items as shown at the bottom of your Form 1040.
During 2017 through 2019, medical expenses are deductible only if, and to the extent, they exceed 7.5 percent of your AGI. For example, if your AGI is $100,000, you can deduct your medical expenses as an itemized deduction only to the extent they exceed $7,500.
If you have $10,000 in medical-related expenses, you can deduct only $2,500. You would add the $2,500 to your other deductible personal expenses. If they total more than $12,000 (single) or $24,000 (married), you would deduct them as an itemized deduction. If you have a $100,000 AGI and your medical expenses are less than $7,500, they are not deductible at all.
Starting in 2020, the percentage threshold for deducting medical expenses is scheduled to increase to 10 percent of AGI. This will make it even more difficult to qualify for the deduction.
For example, if your AGI is $100,000 in 2020 or later, you'll be able to deduct medical expenses only if, and to the extent, they exceed $10,000. Thus, you should incur as many health-related out-of-pocket expenses as possible before 2020 so you can take advantage of the lower 7.5 percent limit.
Medical expenses are broadly defined
It should be clear that, depending on your income, you have to have a lot of medical-related expenses to get any deduction for them. The higher your income, the greater your medical expenses must be.
When in fact, your deductible medical expenses might be larger than you think. Lots of things you might not regard as medical expenses are deductible. Paying for these will add to your total medical expenses for the year.
The IRS defines deductible medical expenses to include any payment for "the diagnosis, cure, mitigation, treatment, or prevention of disease, or treatment affecting any structure or function of the body." That covers a lot of territories. It includes money you spend out-of-pocket on doctors and dentists; as well as nursing care, hospitalization, lab fees, and long-term care.
But medical care expenses include much more. For example, you may deduct fees you pay to chiropractors, psychiatrists, optometrists, psychologists, osteopaths, acupuncturists, podiatrists, and even Christian Science practitioners. You can also deduct things like transportation costs for health treatment and the cost of remodeling your home to accommodate a handicap. Such as, non-emergency medical transportation and adding wheelchair ramps.
You can deduct health insurance premiums you pay, including dental care and long-term care. You can also deduct premiums you pay for Medicare Part B (supplemental coverage) or Part D (prescription coverage).
On the other hand, if you're self-employed, you may deduct health insurance premiums directly from your income as a special personal deduction. This is better than deducting them as an itemized deduction because this deduction is not subject to the 7.5 percent threshold discussed above.
Remember to include deductible expenses for dependents
Also, keep in mind that when you figure your annual medical costs, you may deduct expenses for yourself, your spouse, your dependent children, and any other dependents you claim on your tax return. For example, if an elderly parent qualifies as your dependent, you may deduct out-of-pocket expenses for his or her medical care.
However, there are some health-related expenses that are not deductible. For example, you may not deduct nonprescription drugs or the cost of cosmetic surgery (but reconstructive surgery is deductible). Nor can you deduct veterinary fees.
You can find a list of deductible and nondeductible medical expenses in IRS Publication 502, Medical and Dental Expenses.
One way to increase your medical expense deduction is to group your out-of-pocket medical expenses in a single year, instead of spreading them out over two or more years. This will give you a bigger deduction for the bunched year. The same strategy can be used for charitable contributions.
