Medical Deductions: No Sugar Coating

Just a spoonful of sugar helps the medicine go down. Unfortunately, the tax rules for medical and dental expenses are getting even tougher to swallow. Reason: For 2012, unreimbursed expenses are deductible only to the extent the total for the year exceeds 7.5% of your adjusted gross income (AGI). What’s more, the AGI floor will increase to 10% in 2013.

Hypothetical example: Suppose your annual AGI is $100,000. If you incurred $9,500 in qualified medical and dental expenses in 2012, your deduction is limited to $2,000 ($9,500 – 7.5% of AGI). Even worse, if both your AGI and unreimbursed medical costs stay the same in 2013, you will get no deduction because your deductible expenses do not exceed 10% of your AGI.

There is a brief tax respite for some taxpayers. For those who are aged 65 or older, the floor remains at 7.5% of AGI, but only through 2016. The higher 10%-of-AGI limit applies in 2013 to everyone else. As the law stands now, individuals aged 65 or older will be subject to the higher limit, beginning in 2017.

Despite this grim prognosis, don’t give up hope completely. Medical and dental expenses for the family can add up to a surprising amount over the course of the year. And you may be entitled to claim some expenses you had not counted on. Here are a few areas that may be overlooked.

1. Prescription drugs: Amounts paid for prescription drugs and insulin are considered deductible medical expenses. But over-the-counter medications are generally not deductible.

2. Transportation costs: The deductible amount is not limited to the actual cost of the physician’s or hospital’s services. You may also deduct the cost of getting back and forth from the treatment (even if similar treatment is available nearby). If you travel by car, you can either deduct your actual automobile expenses or a flat rate. For 2012 returns, the flat rate is 23 cents per mile, increasing to 24 cents per mile in 2013 (see “Facts and Figures”).

While the flat rate method is more convenient, you may come out ahead by keeping track of your actual expenses. Remember that you will need records to substantiate your actual expenses.

3. Lodging costs: You can also deduct the cost of staying at a hotel or motel while you are receiving medical care at a hospital or facility out of your area. However, the accommodations cannot be “lavish or extravagant.” The deductible amount for lodging is limited to $50 per day. If a companion’s presence on the trip is required, the cost of the companion’s lodging is also deductible (subject to the $50-per-day limit).

4. Nursing care: If a family member needs nursing services in the home, the cost of such services is a deductible medical expense. The medical care does not have to be provided by a registered or trained nurse. In other words, you can pay someone else (e.g., another family member) to provide the care and deduct the expense.

5. Capital improvements: You can deduct the cost of a home improvement if the improvement is made for a medical reason. For instance, the cost of installing central air conditioning to alleviate a child’s asthma is deductible. Amount eligible for the deduction: the cost above the increase in value of your home. Side benefit: The cost of maintaining and operating the improvement also qualifies for the deduction.

Remember that the 7.5%-of-AGI floor still applies to 2012 returns. Obtain assistance from your tax advisers when it is warranted.