September 23, 2016
By Robert Trinz
With summer now behind us, it’s time for older taxpayers—those ages 65 and above—to consider how they will be affected by the higher post-2016 floor beneath medical expenses.
Some may lose their medical expense deduction next year, while others may even be forced to take the standard deduction for the first time as a result of the raised floor. As this article explains, the first line of defense for older taxpayers is to make sure they aren't missing any medical deduction dollars. Then, it may pay to employ a bunching strategy for 2016-2017 expenses to make sure such taxpayers make the best use of their medical expense deductions.
Unwelcome Surprise on the Way for Seniors
For decades, medical expenses for all taxpayers who itemized were deductible to the extent they cumulatively exceeded 7.5 percent of adjusted gross income. However, in 2010, the Affordable Care Act raised this floor. For tax years beginning after Dec. 31, 2012, the floor beneath the itemized deduction for medical expenses was increased from 7.5 percent of AGI to 10 percent of AGI.
To abate the outcry from older Americans, many of whom have more medical problems than the young, and therefore have heftier medical expenses, the ACA postponed raising the floor for seniors only. For tax years beginning after Dec. 31, 2012 and ending before Jan. 1, 2017—i.e., for 2013, 2014, 2015 and 2016—the 7.5 percent floor applies if the taxpayer or his or her spouse has reached age 65 before the close of the tax year. But the postponement ends this year and the 10 percent floor will take effect for seniors for tax years ending after Dec. 31, 2016.
The higher floor could mean a sharp reduction in itemized deductions for those taxpayers likeliest to incur the heaviest medical bills. For some seniors whose medical expenses are substantial but not especially heavy, the raised floor beneath medical expenses may wipe out the entire deduction.
What's more, the loss of medical expense deductions may result in some seniors having to claim the standard deduction in 2017 instead of itemized deductions. However, in some instances, taking the standard deduction actually could take some of the sting out of the higher floor.
Coping With the Raised Medical Expense Deduction Floor
A taxpayer's first step for coping with the upcoming hike in the medical expense deduction floor is to make sure he or she is claiming or will be able to claim all legitimate medical expenses.
Deductible medical expenses are unreimbursed payments for the diagnosis, mitigation, treatment, prevention of disease or for the purpose of affecting the body's structure or function, and the costs of nursing services and related insurance payments and transportation expenses.
The following is a non-exclusive list of deductible medical costs:
• Advance payments for lifetime care or "founder's fee" paid either monthly or as a lump sum under an agreement with a retirement home, but only for the part of the payment that's properly allocable to medical care. The agreement must require the taxpayer to pay a specific fee as a condition for the home's promise to provide lifetime care that includes medical care. The deductible portion may be determined on the basis of the facility's own experience or that of a comparable facility.
• Attending a medical conference on a chronic disease suffered by an individual, his spouse or dependent (but not meal and lodging costs).
• Capital improvements to the home (e.g., an elevator) to a taxpayer's property (including capital expenditures to accommodate a residence to a physically handicapped individual) may be deductible medical expenses if the primary purpose of the improvements is the medical care of taxpayer, his spouse, or dependents. Generally, the medical deduction is limited to that part of the expenses that exceeds the amount by which the improvement increases the value of taxpayer's property. But some expenses incurred by or for a physically handicapped individual to remove structural barriers in his residence to accommodate his physical condition (e.g., constructing access ramps, widening doorways, installing support bars, moving or modifying electrical outlets and fixtures) are presumed not to increase the value of the residence and may be deductible in full.
• Contact lenses (as well as the cost of equipment and materials required for using them, such as saline solution and enzyme cleaner). Contact lens insurance also is deductible.
• Cosmetic surgery or similar procedure, but only if necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma or a disfiguring disease—e.g., breast reconstruction surgery after cancer mastectomy.
• Diagnostic tests aiding in the detection of heart attack, diabetes, cancer and other diseases (but not the collection and storage of DNA, absent a showing of how the DNA will be used for medical diagnosis).
• Dental treatment, including fillings, x-rays, fluoride treatment, cleanings, etc.
• Eyeglasses, artificial teeth or limbs, braces, elastic stockings, special shoes, wheelchairs, hearing aids, and similar items.
• Eye surgery to correct defective vision, including laser procedures (e.g., LASIK).
• Health insurance (including dental insurance) plan premiums, but premiums paid by an employer-sponsored health insurance plan aren't deductible unless the amounts paid are taxed to the employee (included in taxable compensation box 1 of Form W-2).
• Thus, COBRA continuation coverage for the under-age-65 spouse of a retired worker is deductible as a medical expense; so is the spouse's cost of health care coverage after COBRA ends but before he or she attains age 65. Retired taxpayers may tend to overlook this deduction, since they were used to not deducting health plan premiums during their employment.
• Legal expenses paid to authorize treatment for mental illness.
• Medical Part B (supplementary medical insurance benefits for the aged and disabled) voluntary premiums, and voluntary premiums (e.g., paid by those not covered by social security) under Medicare Part A (basic Medicare), plus Medicare Part D (voluntary prescription drug insurance) premiums. But mandatory employment or self-employment taxes paid for basic coverage under Medicare A are not deductible.
• Nonlicensed healthcare providers that provide physician-ordered assistance and supervision to a patient suffering from dementia.
• Nursing services (need not be performed by a registered or trained nurse). Amounts for such services include room and board, as well as social security taxes, medical insurance and unemployment taxes paid with respect to the service provider. However, if the service provider also performs personal and household services, amounts paid must be divided between the time spent performing household and personal services (nondeductible) and the time spent for nursing services (deductible).
• Payments to providers of medical services, including: psychologists, physicians, surgeons, specialists or other medical practitioners, chiropractors, dentists, optometrists, osteopaths, psychiatrists, and Christian Science practitioners.
• Prescription drugs (e.g., not aspirin) and insulin, if legally procured. A controlled substance (such as marijuana) obtained for medical purposes, in violation of the federal Controlled Substances Act, isn't legally procured and is nondeductible, even if state law permits its doctor-prescribed use.
• Qualified long-term care services (unless provided by a relative who isn't a licensed professional, or by a related corporation or partnership). These services include necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, which are required by a chronically ill individual and provided under a plan of care prescribed by a licensed health care practitioner.
• Qualified long-term care insurance premiums, up to annual inflation-indexed limits. For 2016, the limits are as follows for an individual who attained the indicated age before the close of the tax year: age 40 or less, $390; more than 40 but not more than 50, $730; more than 50 but not more than 60, $1,460; more than 60 but not more than 70, $3,900; and more than 70, $4,870. Qualified LTC insurance contracts must provide only coverage of qualified LTC services, must not pay or reimburse expenses to the extent the expenses are reimbursable under Medicare (or would be but for a deductible or coinsurance amount), must be guaranteed renewable, and must meet other detailed requirements.
• Service animals used in mental health therapy.
• Smoking cessation programs and prescribed drugs designed to alleviate nicotine withdrawal, but not non-prescription nicotine gum and nicotine patches.
• Transportation expenses primarily for and essential to medical care. This includes food and lodging expenses while en route to the place of medical treatment, as well as taxi, car train, plane and bus fares and the cost of ambulance services. Taxpayers also may deduct as a medical expense amounts paid for lodging (not food) while away from home that's primarily for and essential to medical care in a hospital or equivalent, up to $50 per night for each individual.
• Weight-loss program for treatment of a specific disease (e.g., obesity, hypertension), but not the cost of diet food.
An itemizer may be certain that he will exceed the medical-expense-deduction floor for 2016, but may be uncertain about exceeding the floor for 2017. A taxpayer in this situation should consider putting plans in motion now to take care of discretionary or elective medical expenses this year rather than next. Such expenses may include dental implants or bridgework, or expensive eyewear (e.g., variable focus lenses), as well as certain types of surgeries that might safely be postponed or accelerated, such as LASIK surgery, cataract surgery or knee replacement surgery.
Taking care of any unpaid medical or dental bills before the end of the year would have the same effect as discretionary or elective medical expenses.
If a medical provider accepts credit card payment, taxpayers are considered to have paid their medical expenses in 2016 if they pay the provider with a credit card this year, even if the credit card company doesn't bill the taxpayer until 2017. If the provider doesn't accept credit cards, taxpayers could use a card to get a cash advance to pay the provider in 2016. Also, if a taxpayer pays by check dated no later than Dec. 31 that is mailed in an envelope that is postmarked by that date, it will count as a 2016 payment even though the payee doesn't deposit the check until 2017 (assuming that the check is honored when first presented for payment).
Where Deferral May Make Sense
A taxpayer may be fairly certain that he or she will not exceed the medical-expense-deduction floor for 2016, but believes it possible that next year's floor will be exceeded, even though it will be higher. This may be the case where the taxpayer or the taxpayer's spouse has been newly diagnosed with a degenerative disease, or where qualified LTC expenses or expensive nursing services are likely to be incurred next year. In such cases, the taxpayer should consider deferring discretionary or elective medical expenses until next year.
Deferring such expenses also may be appropriate where a taxpayer is likely to claim the standard deduction this year, but knows he or she will itemize deductions next year on account of a non-medical-expense reason. This may include, for example, if the taxpayer plans to purchase a residence or make large charitable contributions.
Robert Trinz is a senior analyst with Thomson Reuters Checkpoint within the Tax & Accounting business of Thomson Reuters.