For those who tend to rely on the tax code for relief from big medical bills, January 1st brought a major change in this process. Beginning in 2013, taxpayers will only be able to deduct medical expenses that exceed 10% of their adjusted gross income. In previous years, this threshold was set at 7.5% of income. This new change will affect taxpayers who itemize their deductions on Schedule A of their 1040 rather than taking the standard deduction, and will not immediately affect people ages 65 and up, as they can continue using the older threshold through 2016.
Additionally, contributions to flexible spending accounts, which are typically used to take care of out-of-pocket medical costs on a pre-tax basis, will be capped by law at $2,500 per year, and adjusted for inflation going forward. In the past, employers were responsible for determining how much their employees could put into these accounts.
These deduction changes, which were first enacted in 2010 to assist in funding the health care overhaul, may unfortunately hit average earners, the unemployed, or the underemployed hard. High-income earners may not be affected as much, as they have always had difficultly with the medical-expense deduction because their medical bills have to be a large percentage of income to qualify. In fact, those who are required to pay the alternative minimum tax are already subject to the 10% threshold.
As of January 1st, a worker earning $50,000 in adjusted gross income will be able to deduct only medical expenses exceeding $5,000, which is up from $3,750 last year. This is a loss of $1,250 in deductions, and equals out to a tax increase of nearly $200, if marginal tax rates remain at 15% for this group of earners. Similarly, an adjusted gross income of $100,000 would warrant a $2,500 loss in deductions, leading to a tax increase of $600-$700, depending on marginal tax rates.
There is no better time than now to give us a call for help with tax planning. Healthcare is important, and being able to afford it is vital, so let us help you develop a plan to increase your savings in order to cover any medical bills that may arise throughout the year. These are not changes you have to face alone – let us help you stay on track to a happy, healthy, and financially sound 2013.