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Tax Accounting for Senior Citizens: Unwelcome Changes Coming

For as long as most can remember, taxpayers who itemized could deduct medical expenses to the extent they cumulatively exceeded 7.5% of adjusted gross income (AGI).  That is, until 2012.

Beginning in 2012, The Affordable Care Act (ACA) raised the floor for most taxpayers to deduct medical expenses. Qualified medical expenses now must exceed 10% of AGI before being included in itemized expenses.

The medical expense floor for older Americans, aged 65 and above, remained at 7.5%, but that postponement ends this year. Beginning January 1, 2017, the floor for senior citizens increases to 10%.  (In September the House voted to repeal the increased floor, but it’s expected that President Obama will veto the bill if it’s presented to him.)

As a result, some seniors may significantly reduce their itemized deductions, and many may find themselves taking the standard deduction instead of itemizing.

Consider a couple with an AGI of $100,000 and $10,000 in out-of-pocket medical expenses.

  • By 2016 rules, this couple could deduct $2,500 in medical expenses in addition to any other itemized deductions. ($100,000 x 7.5% = $7,500 to be paid by the taxpayer; anything above that can be counted as deductible.)
  • Under 2017 rules, no medical expenses would be deductible. ($100,000 x 10% = $10,000 to be paid by the taxpayer.) Unless this couple incurs significant other deductible items, they’ll take only the standard deduction.

Plan now to take the sting out of this tax hike!

If you’re fairly sure you’ll exceed the expense deduction floor in 2016, but are uncertain about 2017, consider whether you could undergo necessary but non-urgent medical procedures this year instead of waiting. For example, perhaps you’ve been procrastinating about dental implants, LASIK surgery, cataract surgery, or knee replacement surgery; now’s a good time to take action.

If you have any unpaid health care bills, take care of them prior to the year’s end. If your provider accepts credit cards, you may be able to charge it at the end of the year and postpone payment of the credit card until January.

Be sure you’re taking all the legitimate expenses you’re eligible for. Per the IRS codes, deductible medical expenses are unreimbursed payments for the diagnosis, mitigation, treatment and prevention of disease, costs of nursing services and related insurance payments, and transportation expense.

Deductible medical costs include (but are not limited to):

  • Advance payments for lifetime care (the agreement must be written requiring a specific fee as a condition for the home’s promise to provide lifetime care that includes medical care).
  • The cost of a medical conference (fees only) on a chronic disease suffered by you, your spouse, or a dependent.
  • The cost of home modifications to accommodate a physically handicapped individual; some limitations exist here, so check with your CPA.
  • Contact lenses, insurance, and supplies.
  • Necessary cosmetic surgery to improve deformities related to congenital abnormalities, injuries, or disfiguring diseases (such as breast reconstruction following a mastectomy).
  • Diagnostic tests to help detect diseases such as heart attack, diabetes, and cancer.
  • Dental treatment.
  • Eyeglasses, artificial teeth or limbs, braces, elastic stockings, special shoes, wheelchairs, hearing aids, and similar items.
  • Eye surgery, including LASIK.
  • Health and dental insurance.
  • Legal expenses paid to authorize treatment for mental illness.
  • Supplementary medical insurance for the aged and disabled.
  • The cost of non-licensed care for the assistance and supervision of dementia patients when ordered by a physician.
  • Nursing services.
  • Payments to medical service providers.
  • Prescription drugs.
  • Qualified long-term care services and insurance premiums.
  • Service animals.
  • Smoking cessation programs.
  • Transportation (and lodging stipends, if necessary) to and from medical care.
  • Weight loss program for treatment of a specific disease.

On some occasions, deferring until 2017 elective medical expenses (such as knee replacement) may make sense. For example, if a spouse is newly diagnosed with a degenerative disease or you anticipate expensive nursing services in the next year.

Additionally, if you anticipate non-medical itemized deductions, such as a new home purchase or a large charitable contribution, then postponing elective surgeries may be advisable.

Now is the time to think through your options and make a list of questions to ask your CPA. Get on his or her calendar so that, together, you can maximize your deductions.

If you’re in North Florida and don’t currently work with a trusted advisor, Patrick & Robinson CPAs would love to put our decades of healthcare accounting experience to work on your behalf.

Contact us at Office@CPAsite.com or 904-396-5400.

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