For many retirees, medical bills and related costs are one of the largest, if not the largest expense in their budgets. That’s why the tax deduction for medical expenses is often so important to those who spend over a certain threshold of their income on doctor bills, medications, insurance premiums, and other related costs.
For several years now, that threshold has held steady at 7.5 percent. If you spent more than 7.5 percent of your adjusted gross income (AGI) on medical expenses, you could deduct the balance of those expenses on your federal income tax return. But for 2021, that threshold was set (under the Affordable Care Act) to increase to 10 percent. Fortunately, Congress decided in December to keep the threshold steady rather than allowing it to increase.
What does this mean? For a retiree living on an AGI of $50,000, medical expenses above $3,750 each year were deductible. So, if your medical expenses were $5,750, you could deduct $2,000 of those when filing your taxes.
If the threshold had increased to 10 percent, then you would only have been able to deduct any medical expenses that exceeded $5,000. In this case, your deduction would have been limited to $750. Holding the threshold at 7.5 percent of AGI means that tax filers can claim a larger medical expense deduction.
This is good news for anyone who experiences considerable medical spending in any given year. But because retirees are usually more impacted by these types of bills, making the deduction threshold permanent will benefit you to a greater extent.
Please contact a tax professional to get advice on your specific situation, and if you need assistance with Medicare or Medicare Advantage Plans, give us a call and we can discuss your options.