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Excerpt from “The Myeloma Survival Guide”

Chapter 8: Myeloma Tax Savings

by Eric Fisher, CPA, and George Russell, CPA

Please note: The numbers will change, but the strategy remains the same. Consult your tax adviser or the IRS for current allowances.

 

Recordkeeping and attention to detail will pay off

In a way, searching tax law for benefits is like going through the cushions of an enormous sofa.  Gems will be discovered.  Also cookie crumbs.  If you have the patience to endure this sort of thing, join us.  If not, take this chapter to your tax adviser.  Armed with this knowledge, she or he should be able to help you arrange your tax affairs so that savings result.

That said, if your taxable income is low enough that your tax is zero, then clearly income taxes are not an issue, and you can skip this chapter.

Overview

If your allowable medical and dental expenses are large enough, much of them may be deductible; however, we do not get to deduct all of them.  Congress, in its (in)finite wisdom, decided that some amount of medical expense is “normal” and declared a portion not deductible.  They specified that ten percent of Adjusted Gross Income (AGI) is a floor that must be subtracted from the total medical and dental expenses.  (AGI is the net total shown on the bottom of page 1 of your Form 1040)  Thus, the tax code generally affords the most medical deduction to those with lower incomes.  For example, if your tax return shows AGI of $ 150,000,you would need medical deductions that exceed $ 15,000 to benefit.  If you show $ 50,000 of AGI you would need medical deductions exceeding $ 5,000.

We suggest that, if you have income, you keep track of your expenses so you or your tax preparer can sort through this complicated matter and get you all the benefit to which you are entitled.  So buckle your seat belt and read on.

Qualified Expenses and How They Become Tax Deductions

So, what do you get to deduct?  What must you keep track of?  The Internal Revenue Service uses the term qualified medical expenses and blames Congress for the controversy over which costs are acceptable versus which are not.  Seemingly endless litigation and politicking have resulted, as you can imagine.  But for the purpose of learning the ropes, please accept the fact that there is a list, and that all of a myeloma patient’s medical expenses are probably on it.  IRS Publication 502, Medical and Dental Expenses (available at the IRS website www.irs.gov) contains lists (that are not all-inclusive) of expenses that ARE includible and those that are NOT includible.  These lists are reproduced in part at the end of this chapter.

As explained in IRS Publication 502, qualified medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body.  They include the costs of equipment, supplies, and diagnostic devices for these purposes.  They also include dental and ophthalmological expenses.

Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness.  They don’t include expenses that are merely beneficial to general health, such as vitamins or a vacation.  If, however, you have written doctor’s orders for such expenses, an IRS examiner may consider allowing it… that’s “may”, not will.

Medical expenses include the premiums you pay for health insurance and the amounts you pay for transportation to get medical care.  Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract.

Whose medical expenses can you include?  Yours, your spouse’s, and your dependents’.

When can you deduct your qualifying medical expenses?  In the year you pay them.  You can count payments made this year for medical expenses incurred in prior years and the current year, but you can’t count payments for next year’s expenses.  Payments can be made by cash, check, credit card, or online.  Note that credit card payments count when the amount is charged, even if the credit card bill is paid in a later year.

Also note that costs reimbursed by insurance or a pre-tax FSA (Flexible Spending Account), or covered through an HRA (Health Reimbursement Arrangement), or an HSA (Health Savings Account), or paid by others are NOT includible.

 

A Partial Listing of Qualified Medical Expenses

Sampling of Acceptable Deductions  

Alcoholism treatment
Ambulance
Artificial limb
Artificial teeth
Autoette
Bandage
Body scan
Braille book and magazine
Contact lens and supplies
Crutch
Dental treatment
Diagnostic device
Drug addiction treatment
Eye surgery or keratotomy
Eyeglasses
Fertility enhancement

Guide dog/service animal
Health insurance premiums
Hearing aid
Imaging
Lab fees
Legal fees to obtain treatment
Lifetime care-advantage payments
Medical conferences
Medical equipment
Medical information plan
Medical supplies
Medicare premiums
Nursing home
Nursing services
Organ transplant
Oxygen
Physical examination
Prosthesis
Psychiatric care
Psychologist
Sterilization
Stop-smoking programs
Surgery
Telephone equipment for the deaf
Therapy
Vasectomy
Weight–loss program, prescribed
Wheelchair
Wigs due to illness
     
Sampling of Unacceptable Deductions or Non-Deductible Items:  
Childcare, normal
Cosmetic surgery, elective
Dancing lessons
Funeral expenses
Hair transplant
Health club dues
Illegal drugs
Life insurance
Medical care, future
Non-prescribed items for general health
Swimming lessons
Teeth whitening
Veterinary fees

 

The Details

Transportation

The cost of both local and out of town travel for medical care is deductible.  Local travel may be calculated using the standard medical mileage rate, which for 2016 was 19 cents per mile, or you may add up your actual direct expenses for gas or taxi fare paid.  Any parking fees and tolls are allowed in addition to mileage.  Out-of-town travel includes air fare, bus fare, and cab rides, Uber, but not meals.  Lodging necessary to receive treatment from a licensed medical provider is allowed at up to $50 for each night for each person.  Due to the debilitating nature of myeloma, a companion’s reasonable travel costs for both local and out-of-town medical treatment is, in many cases, deductible.


Cosmetic Surgery

Cosmetic repair that is medically necessary, or that corrects deformities due to a medical condition, is deductible.  An example would be breast reconstruction after surgery.


Types of Drugs
What you pay for prescription medicines is deductible.  Costs of over the counter medicines that do not require a prescription, such as aspirin, are not deductible even though recommended by a doctor.


Health Practitioners
The cost of services of an acupuncturist, chiropractor, osteopath, optometrist, and Christian Science practitioner are deductible.  Costs of other healers, both licensed and unlicensed, might be includible; for example, Native American healing ceremonies have been allowed.


Home Improvements
The cost of changes to your home, only to the extent it exceeds the increase in value to your home, may be deductible if made to accommodate a medical disability.  Examples of such improvements include installing entrance or exit ramps; widening of doorways and hallways; lowering or modifying kitchen cabinets and equipment; moving electrical outlets and fixtures; installing porch or stair lifts; modifying fire alarms, smoke detectors and other warning systems; modifying stairways; installing handrails or grab bars in bathrooms and elsewhere; modifying hardware on doors; modifying in front of entrance and exit doorways; and grading the ground to provide access to the residence.

Long-Term Care
The cost of long-term care facilities that are primarily necessary for medical reasons are deductible.  Other home care or retirement home costs do not qualify, but costs of medical services and medicines provided while there are deductible.

Long-Term Care Insurance

Qualified long-term care insurance premiums are deductible up to the allowed age-based limits.  For 2016 these limits are:


  • Age 40 or under - $390
  • Age 41 to 50 - $730
  • Age 51 to 60 - $1,460
  • Age 61 to 70 - $3,900
  • Age 71 or over - $4,870


Deducting Your Qualifying Medical Expenses

When preparing a tax return, one may subtract either a Standard Deduction or the total Itemized Deductions from the AGI (Adjusted Gross Income, remember?).  Itemized Deductions are listed on Schedule A, attached to the return.  It is on Schedule A that ten percent (10%) of AGI is subtracted from the total of the includible medical and dental expenses.  Then other Itemized deductions are listed, including certain taxes, home mortgage and certain other interest, charitable contributions and certain miscellaneous deductions.  The total Itemized Deductions (on Line 29 of Schedule A) is then carried to Line 40 of Form 1040, and subtracted from AGI.  (We note that if the AGI is large enough, the tax rules require that certain deductions, notably taxes and charitable contributions, be “phased out” or reduced.  The allowed medical and dental deductions however, are not reduced)

Notice that if the total Itemized Deductions are smaller than the Standard Deduction, then one does not choose Itemization and the Standard Deduction is taken.  For 2016, the Standard Deduction allowed to a Single filer under age 65 who does not Itemize is $6,300.  If 65 or over it is $7,850.  On a joint return, the Standard Deduction allowed for 2016 is $12,600, if both the taxpayer and spouse are under 65.  For each one aged 65 or over (and/or legally blind), add $1,250.

 

Timing the Medical Expense Deductions

The ten percent medical expense “floor”, the Standard Deduction, and itemized deduction rules, can present a tax planning opportunity.  By “bunching” medical expense payments and the payment of other itemized deductions into one year, and then taking the Standard Deduction in another year, you may be able to get more tax benefit from your medical expenses.  To illustrate this, let’s say you need new glasses near the end of the year.  If you know you will have enough medical expenses to exceed 10% of AGI, buy and pay for the glasses before the end of the year and take the deduction.  If, however, you know you will not beat the ten percent of AGI, then pay for the glasses in January and hope to deduct it the next year.  Your timing of charitable contributions and property tax payments could be similarly “bunched”.


Alternative Minimum Tax

If your income is large, you might be subjected to the dreaded Alternative Minimum Tax.  In 1969, Congress decided that too many wealthy individuals were avoiding taxes by taking advantage of tax planning opportunities created by that august body in earlier years. The Alternative Minimum Tax (AMT) was devised to “rectify” the situation.  The AMT requires us, after figuring the income tax the regular way, to figure the tax again, without deducting property taxes or state income taxes, without exemption deductions, and without certain other deductions.  It allows large AMT Exemption deductions but then phases those out when incomes are large.  If this alternative tax is higher than the regular tax, then the higher amount of tax is paid.  The AMT exemption amounts for 2016 are $53,900. for a Single filer and $83,800. on a joint return.  As a practical matter, this complex calculation can impact single filers with as little as $150,000 of income and joint filers with as little as $236,000, if they have large amounts of certain deductions, but, ironically, if their income is large enough, the AMT doesn’t affect them!

Tax-Advantaged Accounts

Several types of accounts can be set up to pay medical expenses, with a variety of tax consequences.  These accounts can be beneficial to a limited number of taxpayers and the rules can get complex.  Those establishing one of these accounts should carefully review the rules with a tax advisor.

Health Savings Account (HSA)
Health Savings Accounts allow eligible individuals to save for and pay health care expenses on a tax-free basis.  To be eligible the participant must be covered by a high deductible health plan (HDHP), with no other health coverage -- and not be enrolled in Medicare.  Annual tax-deductible contributions are limited. For 2016, with self-only coverage, under age 65, the maximum contribution is $3,350, for family coverage under age 65, $6,750.  The contribution limit for age 65 and over is $7,750.
 There are deductibles and other details that one must check before electing one of these tax-advantaged options. 

Health Reimbursement Arrangements (HRA)
This is an employer-funded plan that reimburses employees for qualified medical care expenses.   Employees are not taxed on these reimbursements, nor do employees deduct the expenses.  Reimbursement limits are set by the plan.

 

Flexible Spending Arrangment (FSA)
Under an employer’s IRC Section 125 cafeteria plan, an employee may exclude up to $2,550 of income from tax by placing it into an FSA for health care.  This pre-tax money is then used to pay medical expenses.  Since this money is not taxed, no deduction is allowed when the money is used for medical expenses.

While unused amounts remaining at the end of the year are normally forfeited (“use-it-or-lose-it”), the plan may either permit a grace period of two and a half months to use the funds or allow a carryover of up to $500.

 

Disclaimer

Things change in the tax world.  All the time.  Taxpayers and tax practitioners are spending about six billion hours a year complying with around four million words of federal tax code.  For a little perspective, six billion seconds ago, the U.S. flag had twenty-four stars. John Quincy Adams was president of the United States.  Six billion minutes ago Trajan was Emperor of Rome, while in China the Yangchow era of the Chinese Eastern Han Dynasty ended.

For the most current information see the IRS website www.irs.gov or consult your tax advisor.

 

Caveat Emptor
Updated: August 2017