The end of the year is once again upon us, meaning that it is time for clients to perform their annual end-of-year tax checkup and evaluate whether any year-end action steps could help reduce their tax bill for 2018.
While in past years, the list of year-end action items could usually be generated based on a check-the-box approach, tax reform changed the calculus for many taxpayers this year—and introduced new savings opportunities that many clients may wish to explore. One important change was tax reform’s temporary reduction of the threshold for deduction of medical expenses, an important itemized deduction for many taxpayers who may find it difficult to itemize while tax reform’s individual tax provisions remain in effect.
This year, and this year only, the tax code provision for medical expense deductions can be particularly valuable for some clients—but they need to act now before the new rules expire.
Tax Reform and the Medical Expense Deduction
The 2017 tax reform legislation modified the previously existing medical expense deduction so that, for tax years beginning after Dec. 31, 2016, and ending before Jan. 1, 2019, a more generous 7.5% floor will apply to the medical expense deduction. This means that taxpayers will be entitled to deduct medical expenses to the extent that they exceed 7.5% of adjusted gross income (AGI).
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Because this standard is much more generous than the 10% threshold that existed before tax reform was enacted, and that will once again be the rule beginning in 2019, clients may wish to evaluate whether they can take advantage of the new rule.
A simple example can illustrate. A client with AGI that equals $100,000 in 2019 would have to incur $10,000 in medical expenses in order to be able to deduct those expenses. In 2018, the same client with the same income would only have to incur $7,500 in medical expenses to take advantage of the deduction—a dollar figure that is easily reached by many clients.