Q. For the first time in many years, I think I will be able to itemize deductions for 2013. This is due to dental work that will take me over the threshold needed to itemize. I have read the IRS instructions, but I am still uncertain about whether Medicare Part B and long-term care premiums are deductible as medical expenses and the exact amount I can deduct is confusing. On a slightly different subject, can grandparents deduct college expenses for their grandchild if the check is made payable directly to the university?
A. Hope that’s the last of the major dental work for you. There were some changes to the rules regarding medical deductions beginning with tax year 2013.
In prior years, if you itemized deductions you could claim a deduction for medical expenses not covered by your health coverage that exceeded 7.5 percent of your adjusted gross income, which is on line 38 of Form 1040.
Under the new rules you must have expenses that exceed 10 percent of your AGI. Example: Your AGI is $50,000 and your medical expenses are $6,000. Multiply $50,000 by 0.10 (10 percent) to determine that only expenses exceeding $5,000 can be deducted. Your deduction is limited to $1,000.
There is a temporary exemption from Jan. 1, 2013, to Dec. 31, 2016, for taxpayers age 65 and older and their spouses. If you or your spouse are 65 or older in 2013, 2014, 2015 or 2016 for those tax years, you are allowed to deduct unreimbursed expenses that exceed 7.5 percent of your AGI. In the above example you’d be able to deduct $2,250 ($50,000 x 0.075 = $3,750; $6,000 – $3,750 = $2,250). Beginning Jan. 1, 2017, all taxpayers will be limited to deducting medical expenses exceeding 10 percent of AGI. If you anticipate future major medical procedures and are 65 or over it may make sense to schedule them prior to 2017.
Medical expenses for insurance premiums, preventive care, dental and vision care, prescription medications, visits to psychologists/psychiatrists, glasses, contacts, false teeth and hearing aids are deductible. Expenses incurred in travel for medical care can also be deducted. A complete list of deductible medical expenses can be found in IRS Publication 502.
Long-term care premiums for qualified policies are subject to the same rules as other allowed medical expenses, but there is a limit on how large a premium can be deducted. Any premium amounts for the tax year above the limits are not considered to be a medical expense. The limits are adjusted annually for inflation. (See box for limits in 2013 and 2014.)
To be qualified, policies must adhere to regulations established by the National Association of Insurance Commissioners. The policy must offer the options of inflation and nonforfeiture protection but you can choose not to purchase these options. The policies must also offer both activities of daily living and cognitive impairment triggers, but not a medical necessity trigger. Policies purchased before Jan. 1, 1997 are grandfathered. If you have any concerns, ask your insurance agent if your policy is qualified.
On the side question: You can’t deduct expenses for your grandchild’s college tuition unless the grandchild is your dependent. The same rule applies to credits. If the grandchild is your dependent, you may be able to qualify for the Lifetime Learning Credit and/or the American Opportunity Tax Credit. Tax deductions are limited if AGI is over a certain limit. IRS Publication 970 provides guidance on these tax breaks. You may be thinking about the direct payment to a college or university and the rules on gifting. If you make a payment directly to the educational institution, you can exceed the annual gifting limits (currently $14,000) and not be required to file or pay gift tax. Be sure and discuss this with your child or grandchild so you don’t interfere with any possible financial aid.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624