The medical expense deduction has had its ups and downs in recent years. Under longstanding tax law rules, out-of-pocket medical expenses were deductible to the extent they exceeded 7.5% of adjusted gross income (AGI). Starting in 2012, a tax law change raised the deduction floor to 10% of AGI for most taxpayers, although the 7.5% floor continued to apply through 2016 if either the taxpayer or the taxpayer’s spouse had reached age 65 before the end of the tax year. The deduction floor was scheduled to rise to 10% of AGI for all taxpayers starting in 2017, but a series of temporary law changes lowered the deduction floor to 7.5% for 2017 through 2020.
Permanent reset: This time, a new law change permanently resets the deduction floor to 7.5% for 2021 and later years [Code Sec. 213 as amended by P.L. 116-260 (12/27/20)]. What’s more, unlike previous resets, which often came at year end, clients have plenty of time to plan ahead.
Clients whose medical expenses for 2021 will be near the 7.5%-of-AGI mark may be able to nail down a deduction by accelerating planned medical procedures or purchases that are scheduled for 2021. What’s more, clients whose expenses for 2021 will definitely exceed the 7.5% deduction floor may also want to accelerate planned expenses to increase their deduction.
Shifting strategies may include scheduling upcoming medical or dental checkups, buying new eyeglasses or stocking up on contact lenses, and paying off unpaid medical bills before year end. Even if cash is tight, an expense paid by check or credit card this year counts toward the 2021 deduction, even if the check is not cashed or the credit card bill does not arrive until 2022.
Caution: Accelerating medical expenses or payments only makes sense if a client will itemize deductions for 2021 – and that may not be the case, even for clients who have routinely itemized in the past. The increased standard deduction amounts, coupled with limitations on deductions for state and local taxes and mortgage interest, may cause allowable itemized deductions to drop below the standard deduction for some clients.
Overlooked medical expenses
Clients who will benefit from a medical expense deduction for 2021 should also be sure they claim all the deductible expenses they are entitled to for the year. Here’s a checklist of some not uncommon but commonly overlooked medical expense deductions.
- Transportation essential to receiving medical care
- Lodging while away from home for essential medical care
- Eyeglasses and contact lenses
- Hearing aids
- Physician-prescribed weight-loss programs
- Laser vision correction surgery
- Alcohol- or drug-abuse treatment
- Stop-smoking programs
- Birth control pills
- Pregnancy test kits
- Durable medical equipment (walkers or wheelchairs)
- Home improvements (stair ramps or bathroom support bars)
- Diagnostic devices (diabetes test kits or blood pressure monitors)
- Personal protective equipment such as masks (IRS Announcement 2021-7)
Clients should bear in mind that premiums for medical or dental coverage, contact lens insurance, prescription drug coverage, Medicare (Parts B, C, and D), and long-term care insurance (subject to dollar limits) also count as deductible medical expenses.