Tax Reform and the Medical Expense DeductionDecember 20, 2019
Medical expenses can take a bite out of your budget which is why many take advantage of the medical expense deduction. How did the Tax Cuts and Jobs Act impact this deduction?
*Editor’s Note: This blog was originally posted October 23, 2018 but has been updated as of December 20, 2019 for accuracy and comprehensiveness.
Medical expenses can take a hefty bite out of your budget. If you have unforeseen emergencies not covered by insurance, you can run into some significant expenses. For this reason, the IRS created the medical expense deduction, which allows you to deduct qualified medical expenses that exceed a certain percentage of your budget. Did the TCJA impact this deduction at all? Read on.
What is the medical expense deduction?
The general rules of the medical expense deduction under prior law held that:
- Taxpayers who itemized deductions could deduct qualified out-of-pocket medical expenses that were over 10% of their adjusted gross income for the year.
- Qualified expenses included expenses paid for diagnosis, cure, mitigation, treatment, or prevention of disease, including dental costs.
- The costs must have been incurred for either taxpayer, the taxpayer’s spouse, or dependent.
- Taxpayers could only deduct medical expenses paid in the same tax year as the return.
What did the TCJA change?
The TCJA preserves the deduction but changed the floor from 10% adjusted gross income to 7.5% for tax years 2017 and 2018. Taxpayers in 2017 and 2018 were able to deduct qualified medical expenses that were over 7.5% of their adjusted gross income for the year.
The threshold for deducting medical expenses was scheduled to increase to 10% of AGI for 2019 and beyond, but the Taxpayer Certainty and Disaster Relief Act of 2019 (signed into law December 20, 2019) extends the 7.5% threshold through 2020.
We can help you decide if bunching expenses is the right decision for you and your family. Contact us today!