A common question I receive from many people, including my clients, is “why didn’t my tax preparer include medical expenses on my tax return?”.
What may be happening is your tax preparer may be saving you money in the preparation of your tax return, so instead of asking why, you should be thanking your honest tax preparer.
When I get this question from individuals, here are the first questions I ask of them, and why.
How much in expenses did you actually pay during the tax year?
The reason I ask this question is it does not matter what you were billed from the medical facility, what matters is what you actually pay.
- If you mail a check for payment, the payment date is the date that you mail the check to the provider.
- If you pay using an online system or pay by phone, the payment will be incurred in the year the payment hits your financial institutions statement.
- If you use your credit card, the expense will be incurred in the year the charge is actually placed on your credit card. It does not matter when you actually make the payment on your credit card.
What is your adjusted gross income?
The IRS has further restrictions on how much you can deduct, based on your adjusted gross income. For the 2014 tax year, if you are less than 65 years old, you are limited to any medical expenses that exceed 10% of your adjusted gross income. If you are over 65 years old, you are limited to any medical expenses that exceed 7.5% of your adjusted gross income.
How does this affect you? Let’s look at a few examples:
- Client A is single and 55 years old, reports to me medical payments of $5,000, and has an adjusted gross income of $100,000. We must first calculate the limitation, which in this case is $10,000 ($100,000 X 10%). Since the medical expenses paid of $5,000 does not exceed the limitation of $10,000, I do not input the medical expenses, as the client will not get a tax benefit.
- Client B is single and 55 years old, reports to me medical payments of $5,001, and has an adjusted gross income of $50,000. We must first calculate the limitation, which will be $5,000 ($50,000 times 10%). We then take the total medical expenses less the limitation to determine the medical deduction to be $1 ($5,001 less $5,000).
- Client C is single and 75 years old, reports to me medical payments of $5,000 and has an adjusted gross income of $50,000. We must first calculate the limitation, which will be $3,750 ($50,000 X 7.5%, because the client is over 65 years old). We then take the total medical expenses of $5,000 less the limitation of $3,750 to determine the deduction is $1,250.
Will you have any other itemized deductions this year?
Now, we must compare all of your itemized deductions to the standard deduction to determine if you will itemize on your tax return, or take the standard deduction. Let’s further examine Client B above.
- If Client B had additional itemized deductions of only $2,000, their total itemized deductions would only be $2,001. In 2014, they would be allowed a standard deduction of $6,200. Since their total itemized deductions do not exceed the standard deduction, they will take the standard deduction rather than itemized deductions.
- If Client B had additional itemized deductions of $7,000, their total itemized deduction would be $7,001. Since the total itemized deductions exceed the standard deduction, they will be able to take advantage of their medical expense deduction.