One of the biggest hurdles older adults face when it comes to managing money and planning for their financial future is the rising stack of medical bills. Out-of-pocket costs are a significant expense for those who are 65+, especially those who are retired. This year, make the most of tax season by claiming those medical expenses that exceed 7.5% of your Adjusted Gross Income (AGI). Set to climb to 10% for 2021, senior organizations that include the AARP pushed for a permanent fix to the rising medical expense deduction. In December 2020, Congress passed a bill lowering the threshold to 7.5% permanently.
The first thing you need to do is decide whether you think itemizing your deductions will be more beneficial than receiving the standard deduction, which is higher for those who are at least 65. If you had large unreimbursed medical and dental expenses, paid mortgage interest or real property taxes on your home, had significant unreimbursed casualty or theft losses from a federally declared disaster or made sizable contributions to qualified charities, your allowable itemized deductions may be greater than your standard deduction.
If you itemize your deductions on a Schedule A (Form 1040), you may be able to deduct expenses you paid that year for medical and dental care for yourself, a spouse and dependents. You may deduct only the amount of your total medical expenses that exceed 7.5% of your AGI — gross income minus adjustments to income. Gross income includes your wages, dividends, capital gains, business income, retirement distributions and other income. Adjustments to income include contributions to a retirement account. So if your AGI is $50,000, your medical expenses for the year must exceed $3,750.
Medical expenses that are tax-deductible include a broad range of services, including (but not limited to) the following payments:
In addition, if you’re self-employed and have a net profit for the year, you may be eligible for the self-employed health insurance deduction. This is an adjustment to income, rather than an itemized deduction, for premiums paid on a health insurance policy covering medical care, including a qualified long-term care insurance policy for yourself, your spouse and dependents. If you don’t claim 100% of your paid premiums, you can include the remainder with your other medical expenses as an itemized deduction.
Expenses that are not tax-deductible include:
If you’re an employee, don’t include in medical expenses the portion of your premiums treated as paid by your employer. Employer-sponsored premiums paid under a premium conversion, cafeteria plan or any other medical and dental expenses paid by the plan aren’t deductible unless the premiums are included in box 1 of your Form W-2, Wages and Tax Statement.
You can only include medical expenses paid during that tax year. So you need to pay attention to the date a bill was paid, not the date the service was provided. For example, if you had an appointment or procedure in 2021, but you didn’t pay the bill until 2022, you could include that expense on your itemized deduction for 2022. However, if your appointment was in 2022, but you paid the bill in 2023, you need to wait until you file your 2023 taxes to claim that expense.
Planning for a smooth tax season, as well as your financial future, can be one of the most difficult things you ever experience. At Upside, we understand the difficulties you’ll be facing and are dedicated to removing the barriers that prevent you or a loved one from living a stress-free, elevated lifestyle. Speak to an Upside Manager today to discover our expertise in creating an all-inclusive housing experience for older adults.