As you begin preparing your 2017 tax returns, make sure you don't overlook the more generous tax break for medical expenses that the GOP tax legislation made retroactive.
Under the new rules, if your total out-of-pocket medical expenses in 2017 exceeded 7.5 percent of your adjusted gross income, the amount you shelled out above that threshold could be deductible.
This is a change from 2016, when a 10 percent floor was in place for all taxpayers except those older than age 65 (who already enjoyed the lower threshold). In other words, more people potentially will be able to use the tax break, if they itemize their deductions.
"If you have other deductions and the total takes you over the value of your standard deduction, you can take advantage of this," said Lisa Greene-Lewis, a certified public accountant and tax expert with TurboTax.
For 2017, the standard deduction for single taxpayers or married couples filing separately is $6,350. For married couples filing jointly, that amount is $12,700; and for heads of household, $9,350.
About 8.8 million Americans used the medical expense tax break in 2015, saving themselves an aggregate $86.9 billion, according to the AARP Public Policy Institute. The data also shows that 49 percent of taxpayers who took the deduction had income under $50,000 and 69 percent had income below $75,000.
The 7.5 percent floor applies to both your 2017 and 2018 tax return. In 2019, the threshold returns to 10 percent for all taxpayers.
To illustrate the difference this temporary drop can make: With the 7.5 percent floor, a taxpayer with adjusted gross income of $50,000 would need a minimum of $3,750 in medical expenses to qualify for the deduction. At the 10 percent, that same taxpayer would need at least $5,000 — $1,250 more — in expenses to use the deduction.
Remember that if you have dependents, your medical expenses for their care counts toward your total. Also keep in mind that only the amount of qualified costs above the 7.5 percent threshold are potentially deductible.
A variety of medical expenses can count, ranging from co-pays and eyeglasses to travel costs incurred to receive medical care.
"It's really all over the board," Greene-Lewis said. "It could be more medical devices, out-of-pocket expenses for prescriptions, or flying to a seminar about a condition you have."
If you pay for health insurance with after-tax dollars, your premiums might be able to count toward that deductible. Expenses that are nondeductible include cosmetic charges, gym memberships and the like, as well as expenses for which you are reimbursed.
For the self-employed, the rules governing health insurance premiums are bit different. If you have a profit, you might be able to write off the premiums you paid for health, dental and long-term care insurance for you and your dependents.
Because the deduction for self-employment insurance is an adjustment to income, you don't need to itemize to take advantage of it — although it does come with limitations. For instance, the value of the deduction cannot exceed your profit.
Additionally, whether self-employed or not, certain medical expenses come with deductibility limitations, including long-term care premiums (see chart below).
2017 deduction limits for long-term care premiums
| Age before the close of 2017 | Limitation on premium deduction |
|---|---|
| 40 or less | $410 |
| More than 40 but not more than 50 | $770 |
| More than 50 but not more than 60 | $1,530 |
| More than 60 but not more than 70 | $4,090 |
| More than 70 | $5,110 |
Keep in mind that although the 7.5 percent threshold remains in place for this year, it might not benefit you when you go to prepare your 2018 tax returns a year from now. Basically, due to the standard deduction nearly doubling for all taxpayers beginning this year, fewer people are expected to itemize.
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Ready, set, file: Tax season begins