Medical Deductions, Fertility Treatment, and FSA Alternatives

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by on October 12, 2010 at 12:25 am

Should I Save My Medical Receipts?

Quick answer – hopefully not! Medical expenses have to exceed 7.5% of adjusted gross income (AGI) before they have the ability to start counting.

If your AGI was $100,000, you would need $7,500 in medical expenses before you could take a tax deduction. KEEP IN MIND – this doesn’t mean you will be deducting the entire amount. Only the amount that EXCEEDS the limitation. So in this case, medical deductions totaling $7,501 would allow a $1 deduction.

When are deductions likely?

  • On a very low income year. Ironically, income would probably be so low that you wouldn’t recognize a substantial benefit.

A low income year can lower the AGI threshold. AKA 7.5% of $20,000 is $1,500. This is a much easier amount to surpass. When examining disabled and elderly taxpayers, remember some income is not used in arriving at AGI – certain amounts of Social Security, disability, etc…

  • Taxpayers do not have medical insurance

A very tricky situation. If I was personally not paying expenses, this would be my last to go. If you are in this situation where you cannot afford insurance you should check with your State to see what assistance programs they may have available. More and more States are requiring all residents to maintain adequate health insurance. They have programs that provide assistance for those who cannot afford it on their own.

If you’re on unemployment, you should also check to see if there are cobra or other medical insurance subsistence programs available.

  • Taxpayers incur a substantial amount of uninsured medical expenses within a year

Generally these are elective surgeries or similar. A common high level expense is fertility treatments. Bills can pile up in the tens of thousands. Most medical insurance programs do not cover these expenses. This is one scenario where you may be able to recognize a medical deduction within a high income year…

Tips and tricks

  • Remember – a big stack of bills does not mean you have a deductible medical expense. It means you have bills you haven’t paid. Unless you have paid the expenses or have a secured loan they will most likely not be deductible.
  • A surrogate is not a medical expense. This is becoming more common these days. A surrogate mother will carry a child to term. Since the surrogate did not have an ailment (she was able to bear children) it is not deductible.

Best financial medical defense is the FSA

If you know you are going to incur substantial medical expenses (your deductible is $3,000 and you’re going to have a baby that year) use your FSA. An FSA (flexible spending account) allows you to set aside earned income to cover certain medical expenses. This income circumvents Federal, State, Social Security, and Medicare taxes. This is a huge benefit! My average client saves 30-35 cents on a dollar with their FSA

Keep in mind that FSA’s are a use it or lose it system. If you haven’t spent the money by the end of the allocated expense period you lose it. So never allocate more than you’re certain you’ll spend. As FSA rules and regs become more lax, there are more and more items that they can be used to purchase. OTC drugs, acupuncture, perhaps reiki. Look to your plan provider regarding availability and allowable expenses. Federal regs give the individual employers a great deal of leeway in administering the plans.

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