Did you think that 2020 was your last and best shot at a medical expense deduction? Think again. The Consolidated Appropriations Act (CAA) extends the lower deduction floor for medical expenses past its scheduled expiration date.

Even better, the new law change is permanent, meaning it has no expiration date. Taxpayers can benefit from this provision until Congress changes the threshold again, if ever. So, you might have a better chance of qualifying for a deduction this year, next year or beyond than you did in the recent past.

Itemization Matters

The basic premise is this: If you itemize deductions on your tax return, you can write off the cost of qualified medical and dental expenses not reimbursed by insurance in excess of the annual deduction floor. The Tax Cuts and Jobs Act (TCJA) temporarily lowered the floor from 10% to 7.5% of adjusted gross income (AGI). Subsequent legislation extended the lower threshold through 2020.

The CAA preserves the lower threshold as a permanent part of the tax code. This means that you may qualify for a medical deduction you otherwise previously wouldn’t have been able to claim. For example, suppose you have an AGI of $100,000 and incur $10,000 in unreimbursed medical expenses in 2021. If the threshold had reverted to 10% of AGI, as originally scheduled, you would get no medical deduction. But with the lower 7.5%-of-AGI floor in place, you can write off $2,500.

Qualification Matters

For these purposes, “qualified expenses” include payments for the diagnosis, cure, mitigation, treatment or prevention of disease — or payments for treatments affecting any structure or function of the body. Qualified expenses also include, if not deducted elsewhere, health insurance premiums and at least a portion of premiums (the allowed amount is subject to a limit based on the insured person’s age) paid for long-term care insurance.

Some other common deductible expenses include payments for:

• Services of doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists and other medical practitioners,

• In-patient hospital care or nursing home services, including the costs of meals and lodging,

• Acupuncture treatments, 

• Inpatient treatment at a center for alcohol or drug addiction,

• A smoking-cessation program, including drugs to alleviate nicotine withdrawal (if they require a prescription),

• Participating in a weight-loss program for a specific disease or diseases, including obesity, diagnosed by a physician (but usually not for health food items or payment of health club dues for one’s general health),

• Insulin and prescription drugs,

• False teeth, reading or prescription eyeglasses or contact lenses, hearing aids, crutches, wheelchairs, and guide dogs for the blind or deaf, and

• Transportation needed to obtain necessary medical treatment such as fares for taxis, buses, trains and ambulances. It’s important to note that if you use your own vehicle, you can deduct the portion of actual costs attributable to medical-based travel or use a standard mileage rate for convenience. The standard mileage rate for 2021 is 16 cents per mile (down from 17 cents per mile for 2020).

But be aware that you can’t deduct payments for over-the-counter medicines, toothpaste, toiletries, cosmetics, a trip or program for the general improvement of your health, or most cosmetic surgery. Nor can you write off the costs of nicotine gum and nicotine patches that don’t require a prescription.

The differences matter

The IRS provides a lengthy rundown of deductible expenses — as well as expenses that don’t qualify for the deduction — in Publication 502, Medical and Dental Expenses, which you can find at IRS.gov.

Be aware that the deduction can include expenses paid for yourself, your spouse and your dependent children — and possibly even elderly relatives you support. Make sure you add up all the qualified expenses before tax return time.



Sidebar

Other tax items in the CAA

In addition to preserving the lower medical deduction threshold, the Consolidated Appropriations Act (CAA) includes a host of other tax-related measures, including, but not limited to:

• Extending through 2021 certain breaks for cash gifts to qualified charities, including the up-to-$300 above-the-line deduction for nonitemizers (doubled to $600 for joint filers), and the up-to-100%-of-AGI limit for itemizers,

• Clarifying that expenses paid with Paycheck Protection Program (PPP) loans that benefit from tax-free forgiveness may be deductible by a business,

• Extending and enhancing the employee retention credit through June 30, 2021, and the credit for COVID-19-related paid family and medical leaves through March 31, 2021,

• Allowing rollovers of unused amounts in flexible spending accounts (FSAs) from 2020 to 2021 and from 2021 to 2022,

• Extending to December 31, 2021, employee payments of Social Security tax being deferred by employers,

• Increasing the deduction for business meals from 50% of the cost to 100% for 2021 and 2022 if provided by a restaurant, and

• Repealing the tuition-and-fees deduction while increasing the income phase out ranges for the Lifetime Learning Credit.

Finally, the new law extends various other expiring provisions — including the Work Opportunity Tax Credit (See “How to benefit from the Work Opportunity Tax Credit” on page X), the tax exclusion for mortgage debt forgiveness and tax incentives for empowerment zones — generally for a period of five years.