Seniors: Don’t Overlook Medical Write-offs
Updated April 2016
Many seniors have gotten into the habit of just claiming the standard deduction instead of itemizing. That's because seniors typically pay little or no mortgage interest, and they usually don't owe much for state and local income and property taxes either. So the most common itemized deductions often amount to little or nothing.
Plus, folks age 65 and older get larger standard deductions. All that said, claiming the standard deduction may not be the right answer if an older taxpayer has significant medical expenses.
As you may know, medical expenses can only be deducted to the extent they exceed a threshhold of 10% of adjusted gross income (AGI). This increased threshhold took effect in 2015. However. For those 65 or older as of the end of the year, the threshhold remains at 7.5 percent of adjusted gross income (AGI). In adding up expenses, don't make the common mistake of forgetting to count Medicare insurance premiums. Together with other out-of-pocket costs, Medicare premiums can easily put you over the 7.5 percent-of-AGI threshold and also cause an older taxpayer's total itemized deductions to exceed the standard deduction amount.
Here's how to find out if a tax bill can be reduced by itemizing.
Identify Outlays that Count as Medical Expenses
To figure out if you have enough medical expenses to benefit from itemizing, add up the following.
1. Premiums for Medicare Parts B, C, and D Coverage. Seniors enrolled in Medicare can count premiums for Medicare Part B coverage (for medical costs other than hospital bills), Part C coverage (for Medicare Advantage policies), and Part D coverage (for prescription drugs) as medical expenses:
- For most people, the 2016 Part B premium is $121.80 per month ($1,462 for the year), but it can be up to $335.70 per month for a high-income individual ($4,028 for the year).
- Part C premiums depend on the plan, but they can be several thousand per year for each covered person.
- Part D premiums are often in the $13 to $73 per month range per covered person for These Medicare coverage premiums are generally withheld from Social Security benefit payments. If so, you can find the premium amounts for each year on Form SSA-1099 (Social Security Benefit Statement), which beneficiaries should receive shortly after the end of each year.
2. Premiums for Supplemental Medicare Coverage (Medigap Insurance). Seniors can also count premiums paid for private Medicare supplemental insurance policies (often called Medigap coverage) as medical expenses. The cost depends on the plan, but annual premiums can easily amount to $1,000 to $2,000 per covered person or more.
3. Premiums for Qualified Long-Term Care Coverage. Premiums for qualified long-term care insurance also count as medical expenses, subject to age-based limits. For each covered person, count the lesser of the actual premiums paid for the year or the age-based limit for 2016 from below.
For those 61 through age 70, the maximum deductible premium is $3,900, an increase of $100 from 2015. For those over 70 the maximum deductible premium is $4,870, an increase of $120 from 2015.
4. Out-of-Pocket Medical Expenses. Many seniors also incur significant out-of-pocket outlays due to insurance co-payments and deductibles and for dental and vision care. Be sure to add these into the mix.
5. Medical Expenses Paid for Relatives. Did you pay health premiums or uninsured medical expenses for a qualifying relative this year? If you did, count these outlays too. For a person to be your qualifying relative, you generally must pay over half of his or her support for the year, and the person must be your adult child, son-in-law, daughter-in-law, grandchild, father, stepfather, father-in-law, mother, stepmother, mother-in-law, brother, stepbrother, brother-in-law, sister, stepsister, sister-in-law, aunt, uncle, niece, or nephew. It doesn't matter if the relative lives with you or not.
Add Qualifying Medical Expenses Up and Subtract 7.5 Percent of AGI
As mentioned earlier, you can only claim an itemized medical expense deduction to the extent your total expenses exceed 10% percent (7.5% for those 65 and older) of adjusted gross income (AGI). For example, say your AGI is $80,000, and you have $20,000 of medical expenses from the preceding list. Your itemized medical expense deduction is $14,000 [$20,000 minus $6,000 (7.5 percent of your $80,000 AGI)].
Do the Final Calculations
As you can see, you can claim a significant itemized deduction for medical expenses (even after subtracting 7.5 percent of AGI), the next step is to identify any other potential itemized deductions for the year. These can include (among other things):
- State and local income and property taxes (including taxes on cars, boats, and other personal property);
- State and local general sales taxes are allowed (but only if you choose to claim them instead of claiming state and local income taxes).
- Home mortgage interest (if any); and
- Charitable contributions.
Add these to your medical expense deduction, and see if the total exceeds your standard deduction amount of:
- For 2016, $7,850 if you are unmarried and 65 years or older as of December 31, 2016. Unchanged from 2015.
- For 2016, $15,100 if you file jointly and both you and your spouse are 65 or older as of December 31, 2016. Unchanged from 2015
- For 2016, $10,850 if you use head-of-household filing status and were 65 or older as of 12/31/16. This is an increase of $50 over 2015.
Obviously, if your total itemized deductions exceed the applicable standard deduction amount, you should forego the standard deduction and instead claim itemized deductions, on Schedule A of Form 1040, when you file your return.
Note: If a senior taxpayer is self-employed and qualifies for the self-employed health insurance deduction (available for itemizers and non-itemizers), you may be able to add Medicare health insurance premiums to your self-employed health insurance deduction. Contact your tax adviser if this issue affects you.
Conclusion: If you do the calculations explained in this article, you may discover that itemizing is the way to go. If you failed to itemize for earlier years, you can usually recoup the tax savings for up to three earlier years by filing amended returns. However, it's much easier to simply get it right the first time. Contact your adviser if you are interested in filing amended returns or want additional information.
Contact our tax partner, Marcia Geltman if you have additional questions regarding estate planning. Marcia specializes in estate and income tax planning, multi-state tax issues as well as federal and state tax audits for all client types. She is a frequent lecturer for local business and civic groups speaking on a wide range of tax topics including estate tax planning, year-end tax tips, what's new in the tax world, and information for business owners. She can be reached at firstname.lastname@example.org or 973-328-1825.