Medical expense deductions have been an up-and-down proposition in recent years.
Ups and downs
Under longstanding tax law rules, out-of-pocket medical expenses were deductible to the extent they exceeded 7.5% of a taxpayer’s 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 for 2017, but another law change reinstated the 7.5% floor for 2017 and 2018 only. The deduction floor was again scheduled to increase to 10% in 2019, but along came another change.
NEW LAW CHANGE: Legislation enacted as part of the 2020 budget legislation resets the deduction floor to 7.5% for 2019 and 2020 only. The medical expense deduction floor is once again scheduled to increase to 10% for 2021. While 2019 was pretty much a done deal by the time the legislation was enacted in December, there’s still time for one more shot at the lower medical expense deduction floor for 2020.
Consider a bunching strategy
Clients whose medical expenses for 2020 are at or 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 2020 already exceed the 7.5% deduction floor may also want to accelerate planned expenses, especially if it’s unclear whether expenses for 2021 will exceed the expected 10%-of-AGI floor.
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 2020 deduction, even if the check is not cashed or the credit card bill does not arrive until 2021.
CAUTION: Accelerating medical expenses or payments only makes sense if a client will itemize deductions for 2020 – and that may not be the case, even for clients who have routinely itemized in the past. The increased standard deduction amounts that came with the Tax Cuts and Jobs Act, coupled with the 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 2020 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.
- Eyeglasses and contact lenses
- Hearing aids
- Weight-loss programs
- Laser vision correction surgery
- Alcohol or drug-abuse treatment
- Stop-smoking programs
- Birth control pills
- Pregnancy test kits
- Durable medical equipment (ex: walkers or wheelchairs)
- Home improvements (ex: stair ramps or bathroom support bars)
- Diagnostic devices (ex: diabetes test kits or blood pressure monitors)
Clients should bear in mind also 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) count as deductible medical expenses.