For those of you who itemize your income tax deductions, we have a bit of good news. Back in December, Congress signed a new tax package into law, permanently allowing a larger income tax deduction for out-of-pocket medical expenses.
Here’s how it works: You can claim out-of-pocket medical expenses that exceed a certain threshold, established as a percentage of your adjusted gross income. Expenses that fall under that threshold are not deductible, but those that exceed the threshold can be counted as a valuable deduction and reduce your taxable income.
For many years, that threshold was set at 7.5 percent, but the Affordable Care Act had scheduled it to increase to 10 percent in 2021. Now, thanks to the tax breaks passed by Congress in late December 2020, the 7.5 percent threshold is here to stay.
For example, let’s assume that your adjusted gross income for the year is $100,000. All medical expenses that fall under the 7.5 percent threshold, or $7,500, are not deductible. But once your out-of-pocket medical spending surpasses that threshold, you can claim them as a tax deduction. So, someone with an income of $100,000 who spends $10,000 on medical bills this year can claim a $2,500 tax deduction.
This is good news for retirees in particular, whose incomes often drop a bit from their working years yet experience increasing medical expenses. Keep careful records of all of your out-of-pocket medical spending, because you could earn a valuable tax deduction if you itemize your income taxes this year.
For more information on planning for retirement income or medical spending at this time in your life, call us to schedule an appointment. We can help you anticipate and plan for your future retirement budget.