Tax Law Expands Medical Benefits

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Last December's Tax Cuts and Jobs Act (TCJA) made taxpayer-beneficial changes to the itemized deduction for medical expenses and created a new credit for employers offering family and medical leave to its workers.

 

Background

Prior to 2013, medical expenses could be deducted from taxable income only to the extent they exceeded 7.5% of a taxpayer's Adjusted Gross Income (AGI). For example, if your AGI was $100,000 and you paid medical expenses of $10,000, the first $7,500 of those expenses ($100,000 x 7.5%) was excluded and your allowed medical deduction was reduced to $2,500. As part of the Affordable Care Act, that threshold was raised to 10% beginning in tax year 2013. In the prior example, the nondeductible medical expense became $10,000 ($100,000 x 10%) and no deduction could be claimed. Taxpayers 65 and older could continue to use the 7.5% threshold through 2016.

 

Tax Cuts and Jobs Act

TCJA returned the threshold to 7.5% for all taxpayers, but that level is only in effect in tax years 2017 and 2018. Starting in 2019, the level moves back to 10% for all taxpayers. There is no longer a different rule for taxpayers 65 and over. Last week's Alert (see Update below) reported that House Republicans are considering extending the 7.5% threshold through tax year 2020, but the bill's prospects are uncertain.

 

Other TCJA provisions may affect your deduction for medical expenses. For example, the near-doubling of the standard deduction to $24,000 for married taxpayers filing jointly ($18,000 for head of household and $12,000 for others) may mean that the standard deduction is more advantageous for you even with the reduced medical expense threshold, and is not necessary to detail your medical expenditures.

 

Employer Credit for Paid Family and Medical Leave

Another medical-related TCJA provision grants a benefit to employers who provide at least two weeks of paid family and medical leave to employees earning below $72,000 annually. The employer will receive a tax credit of up to 25% of wages paid while the employee is on leave. The credit, available for wages paid in 2018 and 2019, may be claimed under an existing or newly created written policy that satisfies certain requirements. It cannot be claimed when leave is mandated by state or local law.

 

Update

Last week we reported that House Republicans had unveiled the details of their Tax Reform 2.0 package (TCJA Alert #23). On Thursday the Ways and Means Committee approved the measure along party lines, with the full House expected to vote by the end of September. Senate prospects remain uncertain.

 

Please contact your LM Cohen professional if you have any questions about deducting medical expenses or utilizing the employer credit for paid family and medical leave. All our prior Tax Cuts and Jobs Act Alerts are available on the Updates page of our website.

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