Ep. 51 | Maximizing Medical Deductions
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Speaker 2:Everybody. Welcome back to Teaching Tax Hold a podcast episode 51. Today, we're gonna jump headfirst into maximizing medical deductions. So, what that means? Kind of is what it sounds like.
Speaker 2:However, there are some specific ways you need to go about this. So before we jump into those, let's take a moment as always and thank our sponsor.
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Speaker 2:Hey, everyone. Welcome back to Teaching Taxville, the podcast. John here from the TTF team. As always, my cohost, Chris Pacuro, is joining us as well. Welcome back, Chris.
Speaker 4:So amazing to be back, Johnny t. I really missed you.
Speaker 2:Hey. You know what? You know, we always joke around about if you ever got hit by the proverbial beer truck. So we never actually said that you were deceased after getting hit by said beer truck. However, I'm gonna make the assumption that you would have some very, very, very hefty medical bills in place.
Speaker 2:So let's talk about these medical deductions. Chris, let's, let's actually hand the baton over to you a little bit. Maybe get us kicked off and explain in kind of an overview why in the world does the IRS care or I should say why why should some individuals care that the IRS allows for these types of deductions?
Speaker 4:Well, medical deduct medical expenses in general are personal expenses, and most personal expenses are not deductible from your taxable income. That being said, medical expenses are deductible. Now, we're gonna talk about who could actually benefit from that deduction because it's not an automatic deduction, but yeah, if you have medical expenses, especially if they are significant, you might be able to take a tax deduction for these expenses And, if not so if you if you are incurring medical expenses that you're not getting a deduction for, spoiler alert, we're gonna give you some strategies at the end of this podcast to help you out.
Speaker 2:And we're not talking about the Aleve or whatever that my wife has to go buy because she doesn't like my taste in music. We're talking about significant medical expenses, maybe prescription medication, d so was it dir durable medical equipment? So DMEs, I think, is what they call it. So crutches, wheelchairs, etcetera. That's more what we're talking about here.
Speaker 2:Correct?
Speaker 4:Correct. So the Internal Revenue Service does allow taxpayers to deduct, qualifying medical expenses from their personal tax return. Said medical expenses are detailed. I'm sure you've read publication five zero two.
Speaker 2:Absolutely. Not every single line of it. That's what I do. Some people have, you know, their bathroom reading like yourself as, you know, CPA publications. I absolutely have this.
Speaker 4:Actually, that would be a good idea to have wall IRS publications as your wall peep in fact.
Speaker 2:Kinda like when you go to those some of the some of the pubs. Right? And they have, like, random magazine covers and, you know, pages. We're gonna if you ever go into town, I'm gonna come, do some redecorating at your house, maybe. I don't know if your wife would appreciate that, but, you know, it is what it is.
Speaker 4:Well, that's alright. I'm sure she she would find your taste better than mine. So Oh, okay. You said it that way. Well, the so the IRS allows for qualifying medical expenses to be deducted on your federal tax return with some limitations.
Speaker 4:First thing you're thinking of, well, what in the heck is a qualified medical expense? We'll give you the 30,000 foot view of these medical expenses, pretty much necessary and prescribed services. So you mentioned, the, the pain reliever. Well, if it's prescribed by a doctor, then, yeah, it's a it's a qualified medical expense. Some medical medical expenses generally have to be prescribed by a licensed health care professional.
Speaker 4:You know, they're they include, but are not limited to, like, surgeries, dental treatments, doctor visits, etcetera, etcetera.
Speaker 2:So that's And I'm sure this I'm sure it gets into, like, long term care. Right? So my my in laws and and my wife, obviously, they're they're very and that that's their career path is in the assisted, and independent. So basically senior living. So they see a lot of that.
Speaker 2:And I imagine that's one. Obviously, that's a very significant cost that's not like you're getting a, a a pain reliever for a a knee injury. Is would that be one of them as well too, we think? Really, the long term care?
Speaker 4:Yeah. So the qualified long term care services is a whole separate category in the qualifying qualified medical expenses category. I mean, we in teaching tax law, we break down these qualified medical expenses into five categories. Necessary and prescribed services is one, but qualified long term care services is another. So if you are in a long term care or memory facility, those are going to be deductible expenses.
Speaker 4:That being said, some of them that are more personal in nature are not. So, obviously, John, you haven't made a bald joke in a while, but I would not need a haircut if I end up at, like, one of these schools. And so if someone is there and they have a haircut or their nails done, a lot of times those charges go through the facility, That portion is not considered deductible. So but in general, rule of thumb is gonna be your long term care services are tax deductible. The third buck would be your health insurance premiums.
Speaker 4:So that includes your health insurance, Medicare. Those are deductible. We're gonna talk about strategies for that as well because, for most people, those health insurance premiums are either gonna be part already pretax as part of their employment or if they're self employed, I hope you're taking a deduction against your self employment income. But health insurance premiums are definitely qualified business expenses. Transportation costs are is another qualified business expense.
Speaker 4:So a lot of times, you have people that are more mature aged or let's say they were hit by a beer truck and they survived. Let's say they live by themselves. They cannot drive themselves, So they might have to hire a transportation company to to assist them or, you know, they might have a co pay because they're insurance company.
Speaker 2:And I might be jumping ahead a little bit too, but let's take a scenario, right, where I love to set a beer truck example. So say you have a significant injury or a significant illness. Let's let's just let's just give a number. Right? Let's say somebody makes a hundred thousand dollars a year.
Speaker 2:Nice even number. And they have an injury. Let's let's assume that they can still function at work, so they they continue that income of a hundred k a year. And let's just say all you know, their health insurance, for whatever reason, goes up. They have we wouldn't necessarily need long term in home care if you're still working, but maybe now they're working remote.
Speaker 2:So let's just say that hundred thousand dollars of income now is basically offset, say, by 75 or a hundred or $200,000 in a sum of all these expenses. How do how does that really play in? And I apologize if I'm jumping ahead at all or not, but I think it's a good example maybe to jump into to show how there might be thresholds and and limitations involved here.
Speaker 4:Yeah. So we that that's alright. We could jump ahead. So let's say your medical expenses let's say, yeah, your your let's make it really easy and say your adjusted gross income is a hundred thousand dollars. Alright.
Speaker 4:It's AGI. And you have what would happen is, assuming you itemize your deductions, the first seventy five thousand $7,500 or seven and a half percent of your medical expenses are not deductible. The amount that exceeds the seven and a half percent would be deductible as an itemized deduction. So let's keep it real simple. Let's say you had miraculously $57,500 in medical expenses, that first seventy five hundred dollars is not deductible, you would take a tax deduction of $50,000.
Speaker 4:Excellent.
Speaker 2:Is that Your truck was going kinda slow then. He was not he wasn't was not running a red light at 70 miles an hour if you only have 50,000 in medical expenses. But so to make sure that I heard that right, so you got so we'll say a hundred thousand in income was to say 57 and some change in medical expenses and said calendar year after the beer truck incident or beers down the road. That first seven and a half percent of that medical the sum of those medical expenses is not deductible. Everything beyond that seven and a half percent, again, of that sum is deductible, but only if you itemize your deductions.
Speaker 4:Is that correct? And it's when you pay it. So I will trickle out one tax strategy, it would be bunching deductions. So if you're definitely not going to if it's December 15 and you've got a $10,000 medical bill, and you don't think you're going to itemize your deductions that year, but you definitely think you're gonna itemize your deductions next year and have a lot of more medical expenses, you might wanna just put up with that, that nasty letter from the doctor's office for a few more weeks and pay it in the next year.
Speaker 2:Totally unrelated, but I feel like I just got an email, a random spam email telling me I don't know. It was one of those, like, credit consultant companies of of Amer whatever it is. And it was, like, in big bold letters, I think, in their email subject line saying medical expenses no longer are reportable on a credit report. I'm like, where why in the world would you put that in an email? If that's the case, I mean, there might be people bundling these things up for five, ten years, then all of a sudden, Sarah, you know, now it's time to pay them.
Speaker 2:But you bring up a good point. Like, is and this could be a whole other topic, and I don't wanna go down a rabbit hole, but are deductibles part of the sum of all those expenses? Like, say you have a a $6,000 deductible and say you have a child. Right? So
Speaker 4:Yes. Correct. As long as that deductible meets one of our five qualifying medical expense categories, which you've successfully hijacked. So necessarily a prescribed health insurance premiums obviously wouldn't apply. Transportation costs, that's the third one.
Speaker 4:Long term, long term care services, typically, there's not gonna be there won't be a, a co pay or medical equipment and supplies. So if you need a wheelchair, hearing aids, you know, that's that's going to be deductible. Obviously prescription medication, there's typically gonna be a deductible or, a co pay, doctor's visits, anything required or prescribed by a medical professional is going to be deductible. That elective surgeries such as, I don't know, whatever, you know what I'm talking about, just any type of elective surgery. Right.
Speaker 2:My focus down here. I need a nose job.
Speaker 4:My hair plugs or whatever. Hair plugs. I think you could let your imagination go wild with with this, in the subject. Unfortunately, those are not deductible. But you know what?
Speaker 4:You can't put a price on feeling good. Oh, that's a great line right there.
Speaker 2:That's maybe we'll make a t shirt of that and wear that to the next event we go to. Right?
Speaker 4:Well, John, I've got I've got what t shirt I wanna develop. I'm I hope my wife doesn't listen to this, which is probably the case. That we always say you can't put a price on love when people are asking if they should get married. I've had clients ask me if they should get divorced. And I said, you can't put a price on love unless one of the people is real estate professional status.
Speaker 4:Then you Yeah. You can get the cost side going. But
Speaker 2:And if you're looking for that definition, shameless plug, go back to the episode that we did our rep status. So real estate professionals, you'll know what we're talking about. It's almost like the dad jokes. Right? Not everybody gets it unless you know kinda where it's coming from.
Speaker 2:I think
Speaker 4:this is a great one. But And so yeah. So we we've talked about those qualifying medical expenses. We've talked about the limitations and thresholds at 7 and a half percent, of AGI. And in all seriousness, you want to keep detailed records.
Speaker 4:You know, I would recommend a lot of these things you can get emailed to you. A lot of times you'll log in if you're in a certain health. You know, we have Vanderbilt Health down here in Nashville. Oh, Vandy Health, you if if you're interested in being a sponsor, we'll let you do it this time. You know, we're we're filled up a couple of years ago or a year ago.
Speaker 4:But, you know, a lot of but you wanna keep those or at least have an have them text or email to you. And, but, yeah, though you know, if you were examined for medical expenses, you wanna make sure you have those receipts and and those bills. Medical expenses are I mean, it's it's it's kind of that insult an insult to injury. You know what I mean? Because no one really wants to pay medical expenses, and then a lot of times they're not you can't take the full deduction for them.
Speaker 4:Right. Unless you do some tax planning, which is a good segue into what we're gonna talk about next.
Speaker 2:Absolutely. And and before we do that, Chris, just something else too. I know we mentioned it a few times. Can you give us really the the quick explainer on what is defined as itemizing deductions for those that aren't familiar with that?
Speaker 4:Well, John, you should have listened to one of our previous episodes, itemized deductions versus standard deduction. Best response. Mic drop. Exact but if you're new to the podcast I can't remember what episode that is. But if you're new to the I know you're gonna look it up now.
Speaker 2:I'll look it up literally right now. Here we go.
Speaker 4:So in so what happens for then thank you for reeling me back in here. Based on your filing status, if you're single, head of household, married separate, married joint, you get a standard deduction of x amount of dollars. So let's just say if you're married, filing joint, easy numbers because it's indexed for inflation, the first twenty five thousand dollars of your of your taxable income, you don't pay federal tax on. That's your standard deduction. If your itemized deductions exceed your standard deduction, then you should take your itemized deductions, and itemized deductions are gonna be your met qualified medical expenses, mortgage interest, property taxes, charitable contributions, tithes, etcetera, etcetera.
Speaker 2:Excellent. And to answer your question, it was actually episode number 13. Mhmm. So you're right. That was one of our first ones from earlier this year.
Speaker 2:So The way back machine. The way back.
Speaker 4:Now if you're listening to this, first of all, you probably deserve some type of some type of prize. And your prize is a free free invitation to the defeating taxes private Facebook group. But if
Speaker 2:There we go. And just imagine fireworks going off right now since we're not watching fireworks and confetti and the screens flashing all different colors and, you know, bottles are popping. There you go. That's your present.
Speaker 4:And for the record, neither of us have had any type of alcoholic beverages today because it might sound like it right now. But, anyhow, in all seriousness, with these medical expenses, it's frustrating when a when a taxpayer incurs these medical expenses. And, by the way, I wanted to mention, it could be for themselves, it could be for their spouse, or it could be any of their dependents. You clump you add all those expenses up together, when you're testing the adjusted gross income limitation. It's frustrating when you can't deduct some of those expenses, like co pays, etcetera.
Speaker 4:So so to offset that, congress created a concept of a health savings account. And for many of the people that can't deduct those expenses, they use an HSA or health savings account, which allows them to put money into a special account. Typically, it's gonna be at a bank or a financial institution, and you get a tax deduction for that contribution, similar to an IRA or if it's with your employer, a four zero one k contribution. And as long as and then within that health savings account, typically, you can I mean, you can buy other assets with it, but it's typically in the savings account or money market? And then you can use those funds to pay for qualified medical expenses tax and it's not taxable when you take that distribution.
Speaker 4:So the idea is if you have a, if you have a a pretty high deductible that you're not able to take a deduction for on your tax return, you wanna use the health savings account or HSA. There are several rules regarding HSAs. Again, reach out to us. We're happy to to give you some information about eligibility, limitations, etcetera, etcetera, but that's one that's the easiest hack to take these nondeductible expenses and make them deductible. And, typically, the people that have nondeductible medical expenses are at a high marginal tax rate because they have a high AGI and, like, they're they're not over the seven and a half percent threshold.
Speaker 2:Absolutely. So we mentioned, you know, HSAs, and I know that that probably comes up, I'd say, wild guess, maybe once every four or five episodes we do because, obviously, they're part of multiple strategies. So this is a, you know, case in point where, you know, this came up again, and it's a great tool. We'll call it a tool in the tax belt, if we will. So looking at how these deductions work as far as for medical goes, I mean, is there anything else that we might wanna add to this before we wrap specifically?
Speaker 2:Maybe another example, of Yeah. Some form when it comes to bundling?
Speaker 4:Let's give them a couple more hacks. We talked about, grouping your deduction, your medical expenses into certain years. Remember, it's not when you receive the bill for the doctor. It's when you pay it. Talked about using health savings account to health savings account to make your medical expenses pretax or tax deductible, however you wanna look at it.
Speaker 4:There are some, new rules out there, that allow you to to do a one time conversion from an IRA or individual retirement account to a health savings account. You might so that's something that you really wanna take a look at if especially if the the fact pattern that typically exists is is this. You might have a mature aged couple. Let's say they Unfortunately, they are incurring significant amount of medical expenses. Let's say they have a $50,000 bill and they have an IRA, they have a small pension, and they have Social Security.
Speaker 4:What they take they need $50,000 out of their IRA to pay medical expenses, then they're probably gonna have to take $75,000 out of their IRA to pay the medical expenses. Right? And now the deductible in your medical expenses is less because you just added $75 in your income subject to that seven and a half percent rule. So there's a special rule for that. There's that one time conversion that says, look, take money out of that IRA, convert it to an HSA tax free, and then use that money to pay those medical expenses.
Speaker 4:So that's something to look into. Finally, if you're a small business owner, we run into this a lot. Small business owner, they might they might typically does not have any employees or might have one employee that is your spouse. You might wanna look into is what's something called a section one zero five plan, and what a one zero five plan allows us for a business to reimburse its employees for their out of pocket medical expenses and take it as a business deduction. So that's something it's governed by section one zero five of the internal revenue code.
Speaker 4:This strategy warrants a, a set whole separate podcast, but I would be remiss if I didn't put that on as my one of my handful strategies to offset the situation where you have a ton of medical expenses and you're not able to deduct it now.
Speaker 2:Excellent. Excellent. And probably with with this and anything else, you know, going back maybe ten minutes on this one, we had mentioned kind of a a large bullet point, if we will, is just keep very, very detailed records. Because without records, you kinda have nothing if for lack of better terms. Right?
Speaker 2:So on that note, go keep those records. If you don't have them, find them. And you can't say the dog ate it or the, what's the old thing? The, the the city or the town courthouse burned down, which was the big thing in what, like, the eighteen hundreds when all the records were lost. Can't say that anymore.
Speaker 2:Everything's digital. Save it somewhere. So on that note, thank you everybody again for joining us on this one. This is a little bit more of a specific topic, but obviously with a a broad scope with under or I should say under that topic specifically. But obviously those questions, shoot them over to us.
Speaker 2:If we're not the best person to answer, and we absolutely have partners that we work with day in and day out who can obviously help us with this as well.
Speaker 4:And I know we had a lot of fun on the podcast, had some chuckles, but in all seriousness, legally and ethically reducing the tax you pay in your lifetime, our goal is to help the teaching tax flow community make it an you know, your medical expenses are inevitable. They're not fun to incur, sometimes, figuratively and late literally, you know, especially if you're getting getting procedure done, we want to make those at least
Speaker 2:tax deductible for you. Absolutely. Well, thank you so much, Chris, for that. And we mentioned strategies. They're not loopholes in a bad way.
Speaker 2:They're strategies which are obviously put in place by congress and enforced by the IRS and accepted by the IRS. So what were recommendations? I know, Chris, you mentioned that really good one too about bundling things together. Obviously, that's part of a strategy and up to the individual themselves. So until next time, we will see everybody next week.
Speaker 2:Thanks for hanging in there with us today on this episode here. We're one episode away from turning one year old. Exciting times here on the podcast. But, again, in all seriousness, we did have a great time doing this show. Heck, we even got to bring up the proverbial beer truck example again which obviously me and Chris love doing.
Speaker 2:We've tried or I should say we try as much as we can to bring the little guy into the show. So glad we could here. Glad it was actually relevant. But as we mentioned, keep those records the best you can. So whether you really even need them at the end of the year or not, it's always good to have them because it is much easier to look at your records and say, not as important.
Speaker 2:I really don't need them this year, but it's a lot harder when it comes down to filing your taxes to think, oh, man. I really wish I would have kept those receipts, kept better records. Trust us. It's the right thing to do. So, next week, again, we turn one year old.
Speaker 2:So, the plans for that are we're gonna do a special episode, a little bit off the cusp, very casual, but as always, just like every other one, we're gonna have a great time doing it. Almost think of it as a little bit of a celebration here as we click over the fifty two week mark. And me and Chris, the plan is we're gonna go live with this likely on Facebook. So, be sure wherever you consume these podcasts, be sure to subscribe but also check us out on Facebook. If you don't already, be sure to follow our pages, like our pages, comment, share, etcetera.
Speaker 2:We greatly appreciate the support. Obviously, we do this show for everybody in our community. So we look forward to the one year celebration and to wrap it up. We'll see everybody next week.
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