When the Health Care Reform Act was signed into law it included a number of tax provisions that go into place over the next few years. One of the biggest changes will impact taxpayers who have medical expenses that can be itemized on their tax return.
In order to reduce your taxes by itemizing medical related expenses your qualified medical expenses need to exceed 7.5% of your Adjusted Gross Income (AGI). To the extent your expenses exceed this limit you may reduce your taxable income dollar for dollar. Medical expenses are fairly diverse and include doctor, dentist, chiropractor, prescription drugs, and hospital stays.
Effective in 2013 and beyond, the AGI threshold limit goes from 7.5% to 10% of your AGI. This change represents a 33% increase in the threshold level before you can deduct any medical related expenses as an itemized deduction. Thankfully there is an exclusion built into the law that allows taxpayers 65 or older to continue to use the lower 7.5% of AGI amount.
What Action to Take Now
To the degree possible you should take advantage of this anticipated change during 2012. That does not mean you can plan for unexpected medical expenses, but perhaps:
- You should plan for elective, qualifying medical procedures to be conducted prior to year-end. But do not plan purely cosmetic procedures as they do not typically qualify for medical expense deductions.
- If you are close to the 7.5% threshold, 2012 would be a good year to load elective medical costs. Perhaps you need an eye exam and new glasses. Why not pay an orthodontist up front for a child’s braces or consider refilling prescriptions prior to yearend?
- If due for a physical, make sure you do it now. If something comes up, you will have plenty of time to make tax-smart decisions on possible follow-up medical expenses.
- Consider shifting income into 2013 to allow your 2012 income threshold to be lower for the purpose of calculating your medical deduction threshold.
Remember, each year you start over from zero and have to build your medical related expenses up to the required threshold prior to taking any deductions. This knowledge can be a powerful tax planning tool.