There’s finally certainty around the medical expense deduction for 2021 and beyond.
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Got high medical expenses in a low-income year? Congress heard your plea. As part of the $1.4 trillion spending bill Congress passed yesterday, millions of Americans will get a permanent break on the deductibility of out-of-pocket medical expenses. The threshold for claiming the medical expense deduction was set to climb to 10% for 2021, but the new legislation lowers the threshold to 7.5%—permanently—a win for Americans with high health care costs, especially seniors. The bill is expected to be signed into law by year-end.
It was senior organizations like the AARP who pushed for the permanent fix, but it’s not just retirees who are good candidates for the tax break. It also helps the unemployed, the underemployed and even working folks with employer coverage who are paying ever more in high out-of-pocket medical costs.
Here’s how it works. You report medical expenses on Schedule A (itemized deductions) of your 1040 federal income tax return and get a deduction to the extent they exceed 7.5% of your adjusted gross income. You have to have enough other itemized deductions (home mortgage interest, charitable deductions, real estate taxes) to beat taking the standard deduction. Say your AGI is $50,000 and you have $4,875 of out-of-pocket expenses. The 7.5% hurdle is $3,750, which would leave $1,125 in deductions, reducing your tax bill.
The medical expense deduction hurdle—or floor—was set at 7.5% back in 1986, then raised to 10% under the Affordable Care Act. Seniors got a reprieve. Then under the Tax Cuts and Jobs Act the hurdle was temporarily brought back down to 7.5% for everyone, and Congress has been extending it at that level annually on a temporary basis through 2020. The permanent change now takes the medical expense deduction off the list of temporary year-end tax extenders and provides certainty for taxpayers of all ages.
What counts as expenses to beat the hurdle? Think broadly: acupuncture to X-rays. Eligible expenses include premiums for Medicare Part B and Part D as well as supplemental insurance. Internal Revenue Service Publication 502 has a complete list. You can claim expenses paid for yourself, your spouse and your dependents. Travel costs—mileage, tolls and parking—to and from the doctor’s office count too.
Even if you don’t have enough expenses to claim the deduction on your federal return, it can carry over onto your state return and save you state income taxes. So hold onto all those receipts.