Health Insurance After-tax Basis Medical Expense Deduction

The prescription from accountants says that with incomes down and insurance premiums up more Americans are qualifying to take medical and dental deductions on Schedule A of their individual tax returns.

The most common mistake people make is assuming they need a big health-care expense to qualify since their eligible medical and dental expenses must be greater than 7.5% of their adjusted gross income.

While that may have been true in the past, over the last three years Canning, who also has a tax practice, has seen an increasing number of clients meet that 7.5% threshold thanks to skyrocketing insurance premiums, deductibles, co-pays and coinsurance.

If you have employer-sponsored health insurance, find out whether you pay your premiums on a pretax or after-tax basis. Only premiums paid on an after-tax basis may qualify for the medical-expense deduction.

Add up out-of-pocket costs
To take the deduction, first, you must itemize rather than using the standard deduction. Second, you can only deduct the amount that is above the 7.5% threshold. And if you are unlucky enough to be subject to the alternative minimum tax, that limit rises to 10% of adjusted gross income.

With a spouse out of work and higher out-of-pocket costs for two elective surgeries, a longtime client is taking the medical deduction for the first time. If you were out of work and received the federal government's 65% subsidy for your Cobra coverage, you also can still deduct the remaining 35% that you paid. "The tax deduction eases the blow.”

While you don't need to add the premium assistance to your gross income, you may have to pay back part of that subsidy if your adjusted gross income was between $125,000 to $145,000 for individuals, and $250,000 to $290,000 if filing jointly. And if your AGI was more than $145,000 or $290,000, respectively you must repay the Cobra subsidy in full as part of your income tax.

Surprising medical deductions
This year, the IRS didn't add anything to its long list of what qualifies as deductible medical and dental expenses, but many eligible costs may surprise taxpayers because they're not covered fully or at all by insurers.