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TCJA temporarily lowers medical expense deduction threshold

With rising health care costs, claiming whatever tax breaks related to health care that you can is more important than ever. But there’s a threshold for deducting medical expenses that may be hard to meet. Fortunately, the Tax Cuts and Jobs Act (TCJA) has temporarily reduced the threshold.

What expenses are eligible?

Medical expenses may be deductible if they’re “qualified.” Qualified medical expenses involve the costs of diagnosis, cure, mitigation, treatment or prevention of disease, and the costs for treatments affecting any part or function of the body. Examples include payments to physicians, dentists and other medical practitioners, as well as equipment, supplies, diagnostic devices and prescription drugs.

Mileage driven for health-care-related purposes is also deductible at a rate of 17 cents per mile for 2017 and 18 cents per mile for 2018. Health insurance and long-term care insurance premiums can also qualify, with certain limits.

Expenses reimbursed by insurance or paid with funds from a tax-advantaged account such as a Health Savings Account or Flexible Spending Account can’t be deducted. Likewise, health insurance premiums aren’t deductible if they’re taken out of your paycheck pretax.

The AGI threshold

Before 2013, you could claim an itemized deduction for qualified unreimbursed medical expenses paid for you, your spouse and your dependents, to the extent those expenses exceeded 7.5% of your adjusted gross income (AGI). AGI includes all of your taxable income items reduced by certain “above-the-line” deductions, such as those for deductible IRA contributions and student loan interest.

As part of the Affordable Care Act, a higher deduction threshold of 10% of AGI went into effect in 2014 for most taxpayers and was scheduled to go into effect in 2017 for taxpayers age 65 or older. But under the TCJA, the 7.5%-of-AGI deduction threshold now applies to all taxpayers for 2017 and 2018.

However, this lower threshold is temporary. Beginning January 1, 2019, the 10% threshold will apply to all taxpayers, including those over age 65, unless Congress takes additional action.

Consider “bunching” expenses into 2018

Because the threshold is scheduled to increase to 10% in 2019, you might benefit from accelerating deductible medical expenses into 2018, to the extent they’re within your control.

However, keep in mind that you have to itemize deductions to deduct medical expenses. Itemizing saves tax only if your total itemized deductions exceed your standard deduction. And with the TCJA’s near doubling of the standard deduction for 2018, many taxpayers who’ve typically itemized may no longer benefit from itemizing.

Contact us if you have questions about what expenses are eligible and whether you can qualify for a deduction on your 2017 tax return. We can also help you determine whether bunching medical expenses into 2018 will likely save you tax.

State and local sales tax deduction remains, but subject to a new limit

Individual taxpayers who itemize their deductions can deduct either state and local income taxes or state and local sales taxes. The ability to deduct state and local taxes — including income or sales taxes, as well as property taxes — had been on the tax reform chopping block, but it ultimately survived. However, for 2018 through 2025, the Tax Cuts and Jobs Act imposes a new limit on the state and local tax deduction. Will you benefit from the sales tax deduction on your 2017 or 2018 tax return?

Your 2017 return

The sales tax deduction can be valuable if you reside in a state with no or low income tax or purchased a major item in 2017, such as a car or boat. How do you determine whether you can save more by deducting sales tax on your 2017 return? Compare your potential deduction for state and local income tax to your potential deduction for state and local sales tax.

This isn’t as difficult as you might think: You don’t have to have receipts documenting all of the sales tax you actually paid during the year to take full advantage of the deduction. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases (for which you will need substantiation).

Your 2018 return

Under the TCJA, for 2018 through 2025, your total deduction for all state and local taxes combined — including property tax — is limited to $10,000. You still must choose between deducting income and sales tax; you can’t deduct both, even if your total state and local tax deduction wouldn’t exceed $10,000.

Also keep in mind that the TCJA nearly doubles the standard deduction. So even if itemizing has typically benefited you in the past, you could end up being better off taking the standard deduction when you file your 2018 return.

So if you’re considering making a large purchase in 2018, you shouldn’t necessarily count on the sales tax deduction providing you significant tax savings. You need to look at what your total state and local tax liability likely will be, as well as whether your total itemized deductions are likely to exceed the standard deduction.

Questions?

Let us know if you have questions about whether you can benefit from the sales tax deduction on your 2017 return or about the impact of the TCJA on your 2018 tax planning. We’d be pleased to help.