Personal finance

Medical expenses come with tax benefits. Here’s how to maximize yours this year

Before the calendar flips to 2020, you might want to see if there are some moves you can make to take advantage of the tax breaks for medical expenses.

Experts say it’s worth exploring, as the cost of health care continues its upward climb. The U.S. spent about $3.5 trillion on health care in 2017, or about $11,000 per person. By 2027, that outlay is expected to climb to $6 trillion, or about $17,000 per person, according to the Centers for Medicare and Medicaid Services.

Additionally, Fidelity Investments estimates that the average couple turning 65 in 2019 will spend $285,000 on health care during the remainder of their lives.

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The three most common planning opportunities for health-care costs involve flexible spending accounts, health savings accounts and the tax deduction for medical expenses.

The flex-spending factor

If you have a health flexible spending account, or FSA, at work, your pre-tax contributions generally come with a use-it-or-lose-it provision when the year ends.

“Definitely use your FSA first to pay for expenses because it doesn’t carry over year to year,” said CPA Brooke Salvini, a member of the American Institute of CPAs’ Personal Financial Planning Executive Committee.

While many employers provide either a grace period of up to 2½ extra months to use the funds for eligible medical expenses or allow you to carry over $500 to the next year, it’s important to make sure you don’t end up forfeiting that tax-advantaged money.

The 2019 contribution limit for FSAs is $2,700, although many people don’t max out. For 2020, the maximum you can put in is $2,750.

Generally speaking, if you have already depleted your FSA (or don’t have one), the next consideration is whether your 2018 medical expenses will get you a deduction on your tax return.

The tax break

While the federal tax deduction for medical expenses will likely be used by fewer people this year — due to a higher hurdle for qualifying — it’s worth checking whether you can take advantage.

First, though, be aware that you must itemize your deductions to use the one for medical expenses.

“That means that you would have to have total deductions that exceed the [2019] standard deduction of $12,200 for single filers or $24,400 for married couples filing jointly,” said certified financial planner Katrina Soelter, director of wealth management for KCS Wealth Advisory in Los Angeles.

Additionally, even you do itemize, you can only deduct medical expenses that exceed 10% of your adjusted gross income (up from 7.5% last year). So for someone with income of $50,000 and medical expenses of, say, $7,000, only the amount above $5,000 — the 10% threshold — would be eligible for the deduction ($2,000).

The basic principle is that there’s no double-dipping for taxes. If you use pre-tax dollars for medical expenses, you can’t also deduct them.

Brooke Salvini

member of the American Institute of CPAs’ Personal Financial Planning Executive Committee

If you’re close to the 10% threshold based on your adjusted gross income, and you know you’re going to itemize your deductions, you might want to accelerate expenses into 2019 so they can count toward the deduction.

“If you’re thinking of getting of getting some medical work done in January or February, maybe you should do it in December,” Salvini said.

If you do that with hopes of deducting your associated costs on your 2019 return, make sure the bill is paid this year.

Also be aware that because only unreimbursed medical expenses count toward the deduction, any expenses covered by money from FSAs or health savings accounts — both of which already are tax-advantaged — is excluded. (More on health savings accounts further down.)

“The basic principle is that there’s no double-dipping for taxes,” Salvini said. “If you use pre-tax dollars for medical expenses, you can’t also deduct them.”

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Assuming you used after-tax money, many expenses count toward the deductible — including co-pays, co-insurance, dental work, travel costs for health care and, generally speaking, insurance premiums. And If you write a check in December to cover any January premiums, that money also counts toward your 2019 deduction.

You can also include the medical expenses of a non-dependent — say, an elderly parent. Even if your charge has too much income for you claim them as a dependent, you can generally count your share of their medical expenses toward your deduction.

The HSA consideration

If you have a health savings account, or HSA, which is offered in conjunction with high-deductible health-care plans, you don’t have to spend your contributions the way you do with an FSA.

That means whatever you sock away in an HSA — plus any growth if your money is invested — can sit there for as long as you want it to. Gains grow tax-free and, as long as withdrawals are used for qualifying medical expenses, tapping those funds also comes with no tax.

Basically, this means that if you can afford to pay your medical expenses out of pocket now, you could consider leaving your HSA money alone. Then at any point in the future — next month, next year or even down the road in retirement — you can withdraw the money for qualifying health-care costs.

“I’m a big fan of contributing to an HSA and not using it right away,” Salvini said.

In fact, as long as you hang on to receipts for health-care costs — those you didn’t use FSA or HSA funds to pay yourself back for and did not count toward the medical expense deduction — you can withdraw the money at any point in the future to reimburse yourself.

Once you reach age 65, you can use the money however you want without penalty (although it would be taxed if not used for medical expenses). Be aware, however, that you cannot contribute to an HSA once you enroll in Medicare.

It’s also worthwhile noting that HSAs are portable, while FSAs are not.

The 2019 contribution HSA limit for individuals is $3,500 and $7,000 for families. For 2020, those amounts are $3,550 and $7,100, respectively. Additionally, if you’re age 55 or older, you can put an extra $1,000 in.

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