Don't overlook the expanded tax deduction for medical expenses

  • A taxpayer with an adjusted gross income of $50,000 would need a minimum of $3,750 in medical expenses to reach the temporary 7.5 percent threshold. That compares with $5,000 — $1,250 more — at a 10 percent floor, which will be in effect in 2019.
  • About 8.8 million taxpayers used the deduction in 2015, saving themselves an aggregate $86.9 billion.
  • Some qualifying expenses are more easily overlooked, including the cost of getting you and your dependents to doctors' appointments.

Even if you're scrambling to get your taxes done, it might be worth taking some time to tally up your 2017 medical expenses.

The result could be a tax break.

A temporary expansion of the medical-expense deduction — coupled with ever-increasing health costs — could translate into a writeoff, even if you haven't been able to use it in the past.

"I'd say if you earn $150,000 or less, there's certainly a chance you could benefit from your medical expenses," said Bill Smith, managing director at CBIZ MHM's National Tax Office in Washington. "And anyone with extraordinary expenses should check, too."

The ability to pay for health-care needs is one of the most critical issues of retirement.
Hero Images | Getty Images
The ability to pay for health-care needs is one of the most critical issues of retirement.

As long as you itemize your deductions instead of taking the standard deduction, out-of-pocket medical expenses that exceed 7.5 percent of your adjusted gross income — your earnings minus certain adjustments — could be deductible for both 2017 and 2018.

In 2019, that floor will jump to 10 percent, which is where it previously was for most taxpayers.

To illustrate the difference this temporary drop can make: A taxpayer with adjusted gross income of $50,000 would need a minimum of $3,750 in medical expenses to reach the 7.5 percent threshold. That compares with $5,000 — $1,250 more — at a 10 percent floor.

The cost of health care has been on an upward trajectory for years. In 2016, the average amount spent on health care per person was $10,348, according to the Centers for Medicare and Medicaid Services. That's up from $9,596 in 2012 and $7,700 in 2007.

While not all of the costs are necessarily borne by taxpayers — i.e., your employer might pay a share of your health insurance premiums — many out-of-pocket expenses count toward the deduction (more on that below).

Most of the value of the tax break goes to middle-income taxpayers, based on the 2016 average per-person health-care expenditure (see chart for illustration).

In 2015, about 8.8 million Americans used the tax break, saving themselves an aggregate $86.9 billion, according to the AARP Public Policy Institute. The research also shows that 49 percent of taxpayers who took the deduction had income below $50,000 and 69 percent earned less than $75,000.

Lower threshold, higher deduction value

Adjusted gross income (AGI)
Average medical expenditure (2016)
10% of AGI
7.5% of AGI
Amount deductible at 10% threshold
Amount deductible at 7.5% threshold
Additional value at lower threshold
$25,000 $10,348 $2,500 $1,875 $7,848 $8,473 $625
$50,000 $10,348 $5,000 $ 3,750 $5,348 $6,598 $1,250
$75,000 $10,348 $7,500 $5,625 $2,848 $4,723 $1,875
$100,000 $10,348 $10,000 $7,500 $348 $2,848 $2,500
$125,000 $10,348 $12,500 $9,375 - $973 $973
$150,000 $10,348 $15,000 $11,250 - - -
Source: Bill Smith, CPA, Managing Director for CBIZ MHM’s National Tax Office

Be aware that although the lower threshold is in place for 2018, the standard deduction has nearly doubled for all taxpayers beginning this year. For example, the amount for married couples filing jointly is $24,000 for 2018, up from $12,700 in 2017.

This means it's less likely that itemizing will give you a bigger tax break than the standard deduction when you go to file your tax returns a year from now.

For your 2017 returns, it's worth exploring the IRS list of qualifying expenses. Although some health outlays might be obvious contenders — i.e., copays, prescription costs — others are more likely to be overlooked.

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For instance, Smith said, some taxpayers don't realize that an elderly person in their care could qualify as a dependent if they meet certain conditions imposed by the IRS.

"If the person qualifies as a dependent, their medical expenses can be rolled into your return," Smith said.

Another qualifying cost easily overlooked is what you spend to get yourself or your dependents to the doctor, whether that's bus fare (or a similar expense) or the mileage on your car.

"It's almost never a big number, but if you're taking care of an ill elderly person who is a dependent, you could be doing a lot of driving around for medical purposes," Smith said.

Remember, too, that long-term care premiums are deductible up to certain amounts, the value of which depends on your age (see chart below).

Deduction limits for long-term care insurance premiums

Age before the end of the tax year
Maximum deduction for 2017
Maximum deduction for 2018
40 or younger $410 $420
More than 40 but not more than 60 $770 $780
More than 50 but not more than 60 $1,530 $1,560
More than 60 but not more than 70 $4,090 $4,160
More than 70 $5,110 $5,200
Source: Internal Revenue Service

If you pay for health insurance with after-tax dollars, your premiums might be able to count toward the deductible.

For the self-employed, premiums for health, dental and long-term care insurance (within the limits) for you and your dependents may be deductible if you show a profit.

Some expenses that can't count toward your total for tax purposes are gym memberships, cosmetic charges and the like, as well as reimbursed expenses. And if you use money from a flexible savings account or health savings account (both of which already are tax-advantaged) to pay for expenses, those outlays cannot count toward the deduction.

And be aware that although you don't send in your receipts and records with your tax return, you would need to be able to produce them if the IRS were to come calling.

This story is part of CNBC's Tax Week coverage as the filing season wraps up on April 17. Stay tuned for more stories on tax tips and savings opportunities.