New Limit on Medical Expense Deduction

Here’s a recent query we received and the answer we provided:

Q: I make only $50,000 a year and have a medical condition that costs me between $4,800 and $5,000 every year. My tax guy tells me that I’ll no longer be able to claim any portion of my medical expenses on my itemized deductions. Could you clarify why?

Sincerely,

Danica R.

A: I believe your tax guy is talking about one of the tax law changes that resulted from the new health care law – affectionately known as “ObamaCare.” To break it down, let me give you a general idea about the before-and-after effects, so to speak.

Through the 2012 tax year, if you itemize deductions on your federal tax returns, one of the things you’re able to claim is the portion of your qualified unreimbursed medical expenses that exceeds 7.5 percent of your Adjustable Gross Income (AGI). Assuming that your AGI is $50,000, as you indicated, 7.5 percent would be $3,750. Therefore, if your unreimbursed medical expenses were $4, 800 you could deduct $1,050 ($4,800 minus $3,750), the portion that exceeds 7.5 percent of your AGI. Likewise, if your expenses were to total $5,000, you’d be able to deduct $1,250 ($5,000 minus $3,750).

Here’s how things change with the new ObamaCare rule, beginning in 2013. You are allowed to deduct the amount that exceeds 10 percent of your AGI (instead of the 7.5 percent of prior years). So given an AGI of $50,000, 10 percent would be $5,000. Therefore, you would be able to deduct only the portion of your qualified unreimbursed medical expenses that exceeded $5,000. Since your medical costs range from $4,800 to $5,000 a year, you would effectively lose the deduction of $1,050 to $1,250 that you were receiving through 2012.

I must mention, however, that for those tax filers aged 65 or older, this new rule doesn’t kick in until 2017. For those younger than that age, it begins in 2013.
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