Medical Expense Tax Deduction UPDATE!

The Tax Cuts and Jobs Act, signed into law in late December, 2017, contained some great news for folks that incur significant medical expenses AND itemize deductions on their tax return.  Historically, the threshold used to determine the amount of eligible/deductible expenses has been 7.5% of adjusted gross income (AGI), until an increase to 10% in 2013.  In other words, eligible expenses exceeding 10% of AGI are deductible expenses, and can be considerable given the rather generous list of allowable expenses.
(See - https://www.irs.gov/pub/irs-pdf/p502.pdf )

In 2013, this threshold was increased to 10% of AGI (per the Affordable Care Act (ACA)), which made it a bit more challenging to arrive at a reasonable figure for tax deduction purposes.  Seniors were given a pass on the increase until 2017.  Enter the Tax Cuts and Jobs Act, which, and this is extremely important - for 2017 and 2018, took the threshold back down to 7.5%!  Unless Congress acts, the threshold will return to the ACA increased level of 10% in 2019.

Example: For 2017 and 2018, a couple filing jointly with annual adjusted gross income of $50,000 could deduct qualified medical expenses that in total, exceeded $3,750 ($50,000 x 7.5%).

Importantly, the tax reform law also significantly increased the standard deduction amounts for singles and married couples filing jointly for 2018, to $12,000 (from $6,350) and $24,000 (from $12,700) respectively.  So careful attention must be paid in evaluating whether it makes sense to itemize, and thus take advantage of the lower medical expense threshold; or simply take the standard deduction. Regrettably, you can't do both.

This temporary (but hopefully made permanent) reduction of the medical expense deduction threshold could be particularly welcoming news to seniors who have, on average, higher medical expenses, including Medicare premiums.  But seniors aren't the only benefactors of the threshold reduction, since there are so many expenses that can be included in the calculation.  Here's a partial list of items that can be included in the list of allowable/deductible expenses:

• Medicare premiums - Parts B, C, D, and Medigap plans. (Hint: in many cases, seniors can find their part B and D premium amounts on social security payment statements.)
• (Qualified) Long Term Care insurance premiums and services
• Fees/Deductibles/Copays/Coinsurance related to services provided by doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, therapists, and nontraditional medical practitioners.
• Payments for prescription drugs (including insulin) that require a prescription (Note: over the counter drugs are not eligible).
• Eyeglasses and contacts, including solutions/cleaners
• Smoking cessation programs
• Weight loss program costs

Again, the link to access IRS publication 502 which includes all eligible expenses is -
https://www.irs.gov/pub/irs-pdf/p502.pdf

Individuals who obtain health insurance through their employer are cautioned that premiums paid by employers, and employee paid premiums that do not appear on form W-2 are NOT allowed for consideration in the deduction.  Most employees pay their share of premiums on a pre-tax basis through IRS section 125, which would render such premiums disqualified in the threshold calculation.  Also, otherwise eligible expenses that are reimbursed through a Health Savings Account (HSA), Health Reimbursement Arrangement (HRA), or Flexible Spending Account (FSA) are NOT eligible for inclusion in the determination of deductible expenses.

Because the threshold reduction may potentially return to 10% in 2019, filers would be wise to take advantage of the reduction in preparing their 2017 tax return, and/or aggregate qualified expenses this year (2018) in order to, as my dad used to say - "make hay while the sun shines"!

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IRS Updates 2018 HSA Family Contribution Amount

On March 5, 2018, the IRS issued a bulletin which contained, among other things, revised cost of living adjustments (COLAs) for 2018.  The previously passed tax reform law (i.e., Tax Cuts and Jobs Act) created the need for the revised COLAs, which have a direct impact in the employee benefits world affecting Health Savings Accounts (HSAs).  The Tax reform law now requires the IRS to use something called the "chained consumer price index" to calculate COLA provisions under certain provisions, one being HSA annual contribution limits.

As a result, the 2018 FAMILY HSA contribution maximum is now $6,850, which is $50 less than the previously announced 2018 family contribution limit of $6,900.  Importantly, the INDIVIDUAL, or "self-only coverage" 2018 limit is not affected, and remains at $3,450.

HSA account holders are affected if they have HSA qualifying, family coverage, and already made their full, 2018 HSA contribution, or have authorized a periodic contribution totaling $6,900.  Here's what such affected individuals need to do to avoid the 6% excess contribution penalty*:

• Individuals who have already made their 2018 contribution totaling $6,900 should contact their HSA custodian/trustee to determine the best way to withdraw/return the now $50 excess contribution.  In most cases, this will involve completing a simple form.
• Individuals who have elected to have a pro rata portion of the previously announced $6,900 maximum withdrawn from payroll should contact the appropriate personnel at their employer (Human Resources, Controller, CFO, manager, owner, etc.) and request an adjusted payroll withdrawal amount reflecting the revised, $6,850 maximum.
• Affected individuals that take appropriate action prior to 12/31/18 will avoid the 6% penalty* for making an excess contribution.

* Technically, an HSA excess contribution is subject to both the 6% excise penalty and ordinary income tax on the income earned from the excess contribution.  Presumably, since the amount of the reduction is so small (i.e., $50); and the reduced amount is coming relatively early in the year (March), there has been no mention of this aspect of the penalty.  However, we want our readers to be aware of this aspect of the excess contribution penalty, and if necessary, contact their tax /preparer and/or HSA custodian.

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