Q. I pay pre-tax premiums for health care to in my paycheck and I have a health savings account (HSA). Are there any medical expenses I can deduct?
— Trying to save
A. Health care costs can be a big line item in your budget. If you’re able to deduct some of the costs, it may take the sting out of it.
However, you can only deduct the amount of expenses that exceeds 10% of your adjusted gross income (AGI), said Altair Gobo, a certified financial planner with U.S. Financial Services in Fairfield, New Jersey.
If you’re 65 or older, you have a lower threshold, Gobo said. The expenses only need to exceed 7.5% of your AGI for 2016. The senior exemption will go away in 2017.
Not every expense is deductible, but lots are.
Equipment, such as crutches, wheelchairs, artificial limbs and hearing aids are deductible, Gobo said. So are dental services, doctor’s appointments, nursing services and hospital services — as long as you haven’t been reimbursed for the cost by your health insurance company.
If you renovate your home because of a medical condition or disease you may be able to deduct the costs, Gobo said.
“That means if you pay for an expense but get reimbursed by your insurance company or anyone else, you can’t claim that expense as if you paid for it,” Gobo said.
He said you can claim expenses the year you paid them or when they were charged if you used a credit card.
Also, if you pay medical expenses from your health savings account, you may not include these payments when considering your deductions.
“Make sure to keep any receipts from doctor visits and pharmacies, bank statements, and credit card statements showing where you paid for services, supplies, and any insurance premiums paid,” Gobo said. “Keeping track of your expenses will save time and headaches when filing your taxes.”
If you’re not sure, talk to your tax adviser or financial professional.
The U.S. Tax Code provides tax relief under various conditions in the form of tax deductions and tax credits. While both of these can save you money, they work very differently. Additionally, there are business tax deductions which are not covered here.
In order to understand how tax deductions and credits operate, it is necessary to provide some basic taxation definitions. A person’s gross Income is “all income from whatever source”. Adjusted gross income (AGI) is gross income minus certain adjustments to income like deductible IRA contributions. AGI is reported on Line 4 of the Form 1040EZ, line 21 of the Form 1040A, and Line 37 of the Form 1040. Most deductions, however, are based on something called modified adjusted gross income or MAGI, which is generally AGI plus many of the adjustments from gross income used to calculate AGI. So MAGI typically falls somewhere between gross income and adjusted gross income.
Our federal tax system operates using graduated or marginal tax rates. As your income increases, the rate at which your income is taxed increases as well. For example, in 2016 the lowest tax rate is 10% for a single filer’s AGI below $9,276, while the maximum rate is 39.6% for single filers whose income is $415,050 or more. There are five other marginal rates in between. AGI cutoffs also vary based upon filing status. Those who file married filing joint returns normally have higher AGI cutoffs.
Varying Levels of Relief
Tax deductions provide varying levels of relief based upon this marginal tax bracket. Normally, the higher your tax bracket, the higher your tax savings from a deduction. So, if you qualify for a $1,000 tax deduction, then the tax savings from that deduction would be $280 for a taxpayer in the 28% marginal tax bracket ($1,000 times 28%). Keep in mind that deductions can be limited or even completely eliminated at higher income levels through something called a phase out. For example, up to $2,500 of qualified student loan interest may be deducted from income as long as your modified adjusted gross income is less than $80,000 (single filer). If you are fortunate enough to make at least $80,000, then you are unfortunate enough to not be able to deduct some or all of this interest expense.
Common tax deductions include interest paid on your primary residential mortgage (including any points paid to finance or refinance the home), interest paid on a second home, state sales taxes paid, charitable contributions, student loan interest, job search expenses, moving expenses for your first job, and military reservists’ travel expenses.
Tax Credits: Dollar-for-Dollar Reductions
Tax credits are much simpler to understand; they are a dollar-for-dollar reduction in taxes owed. While phase-outs typically apply, tax credits are not based on your marginal rate. So, if you qualify for a $1,000 tax credit, then the tax savings from that credit would be $1,000. Most credits are “nonrefundable,” which means that they can reduce total taxes owed to $0, but they cannot create a tax refund when you would not have already qualified for one. Some tax credits are “refundable” meaning that they can reduce your taxes owed to $0 and provide a tax refund on the balance of the credit. For example, the American Opportunity Credit, which is a tax credit for expenses relating to the first four years post-secondary education, provides a credit up to $2,500 for taxpayers whose MAGI is $80,000 or less (single filer). 100% of the first $2,000 of qualified education expenses paid and 25% of the next $2,000 expenses paid qualify for the credit. But this credit is partially refundable. If the credit pays your tax down to zero, you qualify to have 40% of the remaining amount of the credit (up to $1,000) refunded to you.
It is very important to understand that each of these deductions and credits require that you understand the limitations and rules governing their use. You should seek the guidance of a tax professional to make certain that you qualify and that you are applying them correctly.