Reduced Tax Breaks for Medical Expenses Under Obamacare

Medical expense tax breaks are changing under Obamacare.

For decades all taxpayers who itemize have been entitled to a tax deduction for medical and dental expenses for themselves, their spouses, and their dependents. Eligible expenses include both health insurance premiums and out-of-pocket expenses not covered by insurance.

Unfortunately, there is a significant limitation on the deduction, which can make it useless for many taxpayers: You can deduct only the amount of your medical and dental 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).)

For many years, this percentage has been 7.5%. Thus, for example, if your AGI was $100,000, you could deduct your medical expenses as an itemized deduction only if, and to the extent, they exceed $7,500.

However, as a result of the Obamacare reforms, starting in 2013, the AGI percentage threshold has gone up to 10% (except for people 65 and over, who will be exempt from the increase until 2017). This will make it much more difficult to qualify for the deduction. For example, if your AGI is $100,000, you'll be able to deduct medical expenses only if, and to the extent, they exceed $10,000.

Example: Al is an employee whose AGI for 2013 is $100,000. He pays $10,100 out of his own pocket for health insurance and uninsured medical expenses for the year for himself and his wife. For Al to deduct any medical expenses, they need to exceed 10% of his AGI, which is $10,000 (10% × $100,000 = 10,000). Because he paid a total of $10,100 in medical expenses for the year, he can deduct only $100. The other $10,00 in medical expenses cannot be deducted.

Many people assume they’ll never be able to deduct their medical expenses, so they don’t bother to keep track of them. But what if you end up being wrong, perhaps because of a family emergency late in the year? You could end up giving up a valuable deduction without even knowing it, or without having the receipts and records to make sure.

First of all, remember that you may deduct medical 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 your out-of-pocket expenses for his or her medical care. These costs can add up fast. You can only deduct amounts you pay out of pocket without reimbursement from an insurance company or employer.

Moreover, lots of things you might not think of as medical expenses are deductible. The IRS broadly 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 territory.

It includes, of course, money you spend on doctors and dentists; as well as prescription drugs, nursing care, hospitalization, lab fees, and long-term care. But medical 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 (adding wheelchair ramps, for example).

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.

February 2013

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