By Anthony Diosdi
The coronavirus has affected daily life around the world. The World Health Organization says the risk of coronavirus spread is “very high at a global level.” This dangerous contagion will not only put at risk every American’s physical health and well being, coronavirus threatens our financial security with potential costly medical bills. At this point there may be little we can do to avoid our exposure to the coronavirus. However, anyone that incurs medical expenses as a result of this freighening virus or any other illness, may be able to lessen the financial blow of this disease and deduct at least some of their medical expenses. More importantly, taxpayers may control the timing of a medical deduction and shift the deduction from one year to the next.
General Rule for Deducting Medical Expenses
You may deduct certain medical expenses not only for yourself but for your spouse and your dependents as well. Medical expenses are payments that you make for the diagnosis, cure, relief, treatment, or prevention of disease. They also include payments for treatment affecting any part or function of the body. Expenses for transportation for needed medical care are included in medical expenses. Payments for insurance premiums paid with after-tax dollars that provide medical care for you, your spouse, and your dependents are also included in medical expenses.
Below is a partial list of the items that may be deductible as medical expenses:
- Fees for doctors, surgeons, dentists, chiropractors, podiatrists, psychiatrists, and Christian Science practitioners.
- Fees for hospital services, therapy, nursing services, ambulance hire, laboratory fees, and X-ray services.
- Transportation for medical care (including out-of-pocket expenses for your car, such as gas and oil).
- Cost of special equipment such as wheelchairs and motorized wheelchairs.
- Cost of hospital meals and lodging.
Computing the Deduction for Your Medical Expenses
Computing your deductible medical expenses is a simple process. Your allowable medical insurance premiums plus all of your other medical expenses are reduced by 7.5 percent of your adjusted gross income (Adjusted gross income is an individual’s total gross income minus personal exemptions and itemized deductions). Under the 2017 Tax Cuts and Jobs Act, the floor to claim medical expenses as a deduction was scheduled to increase to 10 percent. Fortunately, Congress elected to maintain the 7.5 percent floor for the 2020 tax year. The medical expense deduction is not limited to only your medical expenses, you may also claim your spouse’s and dependents’ medical expenses. However, these expenses are also subject to the 7.5 percent limitation.
If you are considering claiming deductions for medical expenses, you must understand there are differences regarding the deductibility of these expenses if you live in a community property state compared a non-community property state. If you and your spouse live in a community property state such California and file separate returns, any amount you paid for medical expenses out of community funds is divided equally. Each of you may deduct half of the expenses. If medical expenses are paid out of the separate funds of one spouse, only the spouse who paid the medical expenses may deduct them. If you and your spouse do not live in a community property state and you file separate returns, each of you may deduct only the medical expenses you actually paid. Any medical expenses paid out of a joint checking account in which you and your spouse have the same interest are considered to have been paid equally by each of you, unless you can show otherwise. Furthermore, you must reduce your total medical expenses for the year by the total reimbursements (repayments) you receive from insurance or other sources for those expenses during the year. This includes payments you receive from Medicare. The reimbursements may be paid directly to you or to the doctor or hospital.
The actual computation of your medical expense deduction can be demonstrated by the following example. Assume you and your spouse paid the following medical expenses:
$5,000 for medical insurance, $5,000 for hospital bills, $5,000 for doctor bills not covered by insurance, and $5,000 for medicines.
The hospital, doctor, and medicine bills have already been reduced by repayment from your insurance company. Assume you and your spouse’s adjusted gross income is $100,000. The deductible amount is computed as follows:
| Medical insurance | $5,000 |
| Hospital bills | $5,000 |
| Doctor bills | $5,000 |
| Medicines | $5,000 |
| =$20,000 |
| Total medical expenses | $20,000 |
| Minus 10 percent exclusion ($100,000 x .075) | -$7,500 |
| Total deduction | =$12,500 |
If you are reimbursed for medical expenses you deducted in an earlier year from an insurance company, you may need to report the insurance as taxable income in the year it is received.
There are a number of tax planning strategies that you can utilize when claiming medical expense deductions. When claiming a deduction for medical expenses, you must understand that these expenses are deductible only in the year that they are paid. This does not mean you must make cash payments to satisfy your medical expenses in order to deduct them. If you charge medical expenses to your credit card, these expenses are deductible in the year the charge is made. This is the case regardless when you pay your credit card bill. Since medical expenses must exceed 7.5 percent of your adjusted gross income before you can begin taking deductions, it may make sense to aggregate your medical expenses in one year in order to exceed the 7.5 percent floor. Unfortunately, (with the exception of Health Savings Accounts), you cannot deduct a mere prepayment of a possible future bill. A medical provider must issue to you an actual bill or at least an actual schedule of services in order to claim a payment as a medical expense deduction.
In order to maximize medical expense deductions, you may utilize a strategy of medical expense shifting. Medical expenses shifting can be demonstrated by the following example. Assume your adjusted gross income is $30,000. Late this year your doctor issues you bills you $2,000. Your other medical expenses amount to only $250. Since $2,250 is below the 7.5 percent floor, you cannot claim a deduction for your medical expenses this year. If, however, your medical expenses will exceed the ten percent floor next year if the doctor’s bill can be shifted to that year, it may make sense to pay the $2,000 in January of next year, if possible. This means deferring the $2,000 expense until next year will give you another chance of exceeding the 7.5 percent floor (assuming a 7.5 percent floor in 2021). Alternatively, if you have already met your 7.5 percent floor, you should accelerate the payment of your medical expenses.
Conclusion
The coronavirus will likely cost U.S. taxpayers (both insured and uninsured) collectively billions of dollars. At this point there is little that can be done to control the spread of this dangerous contagion and the devastation this or any other disease causes. However, with a little planning, at least we minimize the financial impact that the coronavirus will have on U.S. taxpayers.
Anthony Diosdi is a partner and attorney at Diosdi Ching & Liu, LLP located in San Francisco, California. Diosdi Ching & Liu, LLP also has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in tax matters domestically and internationally throughout the United States, Asia, Europe, Australia, Canada, and South America. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.