RTS #032 Let’s Keep Deducting
Picking up on our “game” from the end of 2023, let’s move onto another common topic for questions around deductions: medical expenses.
I’ll assume you immediately thought, “It depends,” and we can skip past that broad disclaimer. For most taxpayers, there are two hurdles we have to overcome to deduct medical expenses. The first is the standard deduction (now $29,200 for MFJ and $14,600 for single filers in 2024). To claim a tax benefit for medical expenses, we have to be itemizing deductions on Schedule A, meaning total itemized deductions, including state and local taxes, mortgage interest, and charitable giving, and any deductible medical expenses that are over the standard deduction amount for the year. No small task.
The second hurdle is a limit specifically related to medical expenses that disallows medical expenses below 7.5% of adjusted gross income (AGI, line 11 of the 1040) from being included on Schedule A. This is sometimes referred to as a “floor” because only expenses above that amount can be included towards total deductions on Schedule A. So, for a married couple with $200,000 of AGI, only medical expenses over $15,000 would count towards Schedule A.
Not only are those two hurdles critical to clear, but the IRS hates double dipping. Which means that only medical expenses for which the taxpayers have not already received a tax deduction can be included. So, expenses paid for using health savings accounts (HSAs) or flexible spending accounts (FSAs) cannot go towards this total. AND the IRS has a whole list of what does qualify as a medical expense (like doctors visits, medicine, and dental work) and what does not qualify (like most gym memberships and elective surgeries).
That might feel like a lot to navigate (it is), but the great news here is that you don’t need to commit all the details to memory. You need to know what to be on the lookout for and how to ask the right questions. This is a perfect example of where financial advisors are often in a better place than tax professionals to help with tax planning by knowing what’s going on in their clients’ lives beyond the numbers.
Most taxpayers have never deducted medical expenses, so when a big year for medical comes along, they don’t think to mention it to their CPA. If you know your client has had a major surgery, illness, or accident, be the one to ask those questions. In the midst of something clearly not fun at all, you can at least help with the silver lining of making sure tax savings happen. And taking it a step further, if the client has any non-urgent medical needs in the near future, some advance planning on timing can help boost the tax savings. Similar to bunching charitable deductions, where possible, moving the timing of medical expenses into a year where deductions are already high can maximize the tax effect.
What can you do about it?
Do not take for granted that “life” updates are making it to client’s tax preparers. If you know there has been a change that could impact a tax return, share that information with the tax pro or encourage your client to do so if you don’t have a relationship with the CPA (yet). This doesn’t have to be a separate system or process, it likely will come up naturally in the meetings you are already having.
Happy Tax Planning!
