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Tax Reform Series: Changes to Medical Deductions

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Contributed by: Sandra Adams, CFP® Sandy Adams

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The Tax Cuts and Jobs Act (TCJA) is now officially law. We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

With most of the focus on new tax rates after tax reform was recently given the green light, it is easy to forget that some of the biggest changes don’t have anything to do with tax rate — they are about deductions.  In 2018, the standard deductions will increase, (reference MT’s blog on changes to standard deductions) and many limitations will be put in place for those who typically itemize deductions (historically only about 30% of Americans according to available IRS data).  Here we will focus on Changes to Medical Deductions and provide general information on how they work.

One of the more controversial a proposed limitations on itemized deductions during the tax reform debates was the potential repeal of medical expense deductions.  According to the IRS, nearly three-quarters of tax filers who have claimed the medical expense deduction are age 50 or older and live with chronic conditions or illnesses, and seventy percent of filers who claimed this deduction have incomes below $75,000.  The final tax bill DID NOT eliminate the medical expense deduction; in fact, the deduction was temporarily expanded.  Under the final Tax Cuts and Jobs Act, the 10% of AGI threshold for medical deductions is reduced to just 7.5% of AGI both retroactively for the 2017 tax year and for the 2018 tax year (the threshold will return back to the 10% of AGI threshold for tax year 2019 and beyond).

How do Medical and Dental Expense Itemized Deductions Work?

For 2017 and 2018 tax years, any amount of Medical and Dental Expenses (see IRS Publication 502 for a list of items that qualify for the medical/dental expense deduction) above an individual’s 7.5% of AGI “floor” are deductible.  For example, if your AGI is $40,000 and your medical expenses were $5,000 (assuming you itemized), you could claim $2,000 as a deduction [$5,000 in expenses less the floor (7.5% x $40,000 = $3,000)].  Note that you are not allowed to deduct expenses that were paid with pretax dollars or reimbursed by an insurance company.

Your ability to use itemized deductions versus the standard deduction in future years will likely depend not only on the amount of medical expenses you have to deduct, but those expenses in combination with other possible deductions that will have significant changes in 2018 and beyond.  For changes to additional itemized deductions, please see our additional posts to get more information, and please consult your professional planning team, including your financial planner and your tax advisor, as you develop for forward looking tax strategy.

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.

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