Medical Expense Deduction Threshold Increases on January 1, 2013

It is about to become more difficult to deduct medical expenses on your income tax return.   

Currently taxpayers can take an itemized deduction for medical expenses during the tax year that are in excess of 7.5 percent of their adjusted gross income (AGI). The deduction is permitted under Section 213 of the Internal Revenue Code which allows for deduction of medical expenses paid by a taxpayer for himself, his spouse, and his dependents.  

The deduction is taken on Schedule A of Form 1040. For tax purposes, "medical expenses" are pretty broadly defined and can include the costs incurred for long term care. 

Long Term Care Expenses can be Deductible

 

Amounts paid for qualified long-term care services are deductible as medical expenses under Tax Code Section 7702B. Qualified long-term care services are necessary diagnos­tic, preventive, therapeutic, curing, treating, mitigating, re­habilitative services, and maintenance and personal care services (defined later) that are:

- Required by a chronically ill individual, and

- Provided pursuant to a plan of care prescribed by a licensed health care practitioner.

An individual is “chronically ill” if, within the previous 12 months, a licensed health care practitioner has certified that the individual meets either of the following descriptions.

(1) He or she is unable to perform at least two activities of daily living without substantial assistance from an­other individual for at least 90 days, due to a loss of functional capacity. Activities of daily living are eat­ing, toileting, transferring, bathing, dressing, and con­tinence. OR

(2) He or she requires substantial supervision to be pro­tected from threats to health and safety due to se­vere cognitive impairment.

“Mainte­nance or personal care services” is care which has as its primary purpose the providing of a chronically ill individual with needed assistance with his or her disabilities (includ­ing protection from threats to health and safety due to severe cognitive impairment). Don’t forget to get the annual certification by a licensed health care practitioner if you (or your parent) intend to claim a medical expense deduction for qualified long-term care services.   A “licensed health care practitioner” includes any physician and any registered professional nurse or licensed social worker.

A recent US tax court case confirms the deductibility of caregiver expenses, even though the caregivers were not medical professionals. In Estate of Lillian Baral (U.S. Tax Ct., No. 3618-10, July 5, 2011), Lillian Baral suffered from dementia and her doctor recommended that she get 24-hour-a-day care. Her brother hired personal caregivers to assist her. The Tax Court agreed that the payments to the caregivers were deductible medical expenses, even though the caregivers were not medical personnel, because a doctor had found that the services provided to Ms. Baral were necessary.

 

Threshold Raised to 10%

Beginning January 1, 2013, the Health Care Reform law (Section 9013 of Title IX) modifies the medical expense deduction provisions of the Tax Code. The threshold for the itemized deduction for unreimbursed medical expenses is raised from 7.5% of AGI to 10% of AGI for most taxpayers. 

Special Rule for taxpayers who are over age 65

This new higher threshold is effective for tax years beginning after Dec. 31, 2012, except that in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the close of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI. In 2017 the 10% rule will apply to all taxpayers. 

The itemized deduction for medical expenses reduces the tax burden on families struggling to cope with nursing home and other catastrophic long term care expenses. Currently it shields more out-of-pocket spending on health care from taxes than any other tax provision.  It is particularly important for seniors. Studies show that taxpayers aged 65 and over claim the deduction more often and deduct larger amounts than younger taxpayers. Of course, even for those who claim the deduction, the tax benefit offsets only a small portion of their medical costs. Still, the reduced deduction will hurt.