Deducting Medical Expenses From Taxes: Seniors’ 7.5% Solution

If you itemize deductions on your tax return, you may be able to deduct some medical costs.

For most people, only medical outlays over 10% of adjusted gross income are deductible. For those over 65, though, the threshold is easier to reach.

Once you're 65, medical costs over 7.5% of AGI can be written off. This special deal applies to 2015 expenses, on the tax return you're filing now, and also for 2016. For 2017 returns, the 10% threshold will be universal, closing the door on this current deduction break.

The 7.5% hurdle applies if you or your spouse is 65 or older. Age is determined as of Dec. 31 for the year for which you're filing.

Say a hypothetical Ann Baker is age 62. She files a joint tax return for 2015 with her husband Carl, also 62.

The Bakers report $100,000 of AGI and $9,800 of medical expense for last year. The medical outlays are only 9.8% of AGI, under the 10% threshold, so they get no deduction.

Now suppose they live next door to the Dawsons, who have the same $100,000 of AGI and $9,800 of medical bills. Ellen Dawson is also 62.

But her husband Fred turned 65 last year. So the Dawsons' threshold for tax deductions is only $7,500: 7.5% of their $100,000 AGI.

The Dawsons can deduct $2,300 of those medical expenses. That's the amount over the $7,500 threshold.

So seniors should take extra care in toting up medical expenses for their 2015 tax return. There's a greater chance of winding up in tax deduction territory. Every dollar above the threshold is tax-deductible.

Medicare Matters

It may be easier to qualify for this deduction than you realized.

Most people over 65 are eligible for Medicare. The federal Centers for Medicare & Medicaid Services says that 52 million Americans are expected to be enrolled in Medicare Part B this year.

Part B covers physician and outpatient hospital services. In 2015, Part B premiums ranged from $104.90 to $335.70 per beneficiary per month.

Many people have these premiums deducted from the Social Security checks that flow into their bank accounts per month. Regardless of how they're paid, they count towards your total medical expenses.

The same is true for any premiums paid for Medicare Part D prescription drug plans. You also can include out-of-pocket Medicare costs such as deductibles, co-pays, and coinsurance amounts.

Money you spend on prescription drugs also counts towards your total for the year. That could mean outlays if you're in the "donut hole," the coverage gap in Part D where you pay the full cost of drugs.

Medicare has other gaps. Many people buy Medicare Supplement insurance (Medigap) policies to provide certain coverage.

Medigap premiums count in your tally of medical costs on your tax return. Again, that's true whether you pay directly or have the premiums deducted from your Social Security deposits.

Beyond Medicare, seniors are likely to have extensive health care costs. They may buy long-term care insurance policies, for instance. If the LTC insurance contracts are qualified (most policies sold today meet the requirements), premiums may be deductible.

For 2015, policyholders age 61 to 70 can include LTC premiums up to $3,800 as medical expenses. Those 71 or older can include those costs up to $4,750.

Other unreimbursed expenses you can count range from chiropractors to hearing aids to wheelchairs. So it makes sense to go over all of your 2015 outlays carefully, to see if you can take any medical deductions.

And start thinking about front-loading medical expenses into 2016 if you'll be 65 or older.

You might schedule dental implants you'll need, say, or prescription glasses. Once your expenses this year reach the 7.5%-of-AGI level, additional medical costs will be tax-deductible.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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