Higher Threshold for Itemized Medical Deductions in 2013 – Now 10% of AGI

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Higher Threshold for Itemized Medical Deductions in 2013 – Now 10% of AGI

By Kerry Grant

pillsBeginning January 1, 2013, the itemized medical deduction threshold became tougher.  Before 2013, you could claim an itemized deduction for medical expenses paid above 7.5% of adjusted gross income (AGI). This deduction is permitted under Section 213 of the Internal Revenue Code, which allows for deduction of medical expenses for you, your spouse, and your dependents. AGI is the number at the bottom of page 1 of your 1040. It includes all taxable income items such as wages, interest income, Schedule C Income, and Rental Income and subtractions for adjustments to income such as contributions to your IRA, self-employed health insurance, and student loan interest.

In 2013, the threshold for medical deductions increased to 10% because of the 2010 health-care legislation; however, this does not apply until 2017 if you are 65 or older. For example, if you had $100,000 in adjusted gross income, you will only be able to deduct medical expenses exceeding $10,000, up from $7,500 in 2012. That is a loss of $2,500 in deductions, for an effective tax increase of nearly $625, assuming marginal tax rates of 25%.

Because it will be tougher to take the medical expense deduction, you may need to look at other solutions in order to minimize the taxes you pay. For instance, if your employer offers an FSA (Flexible Spending Arrangement) or an HSA (Health Savings Account), maximize the amount you can contribute as this is deducted from your taxable salary. Then, you can reimburse yourself, tax-free, for qualified medical expenses that your insurance does not reimburse.

With FSA plans, individuals should be aware of the annual limits and restrictions. In general, you forfeit FSA funds not used by the end of the calendar year. Beginning with the year 2013, the annual limit for FSA contributions is $2,500. Because the funds may be lost at the end of the year, the recommendation is to set aside just enough funds to cover your expected out of pocket medical expenses such as office co-pays, prescriptions, and eyeglasses. FSA plans provide savings that are pre-tax for federal income, Social Security, and Medicare taxes.

In order to contribute to an HSA, you must have a high-deductible health insurance plan. Unlike an FSA plan, you do not have to spend the money by the end of the year and it can grow for later use. Like an FSA, the contributions are tax-free as are the withdrawals for qualified medical expenses.

In summary, plan ahead and make sure you are using the tools available to you. This will decrease the amount of taxes you pay and keep more money in your pocket.

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