repost­ed from WSJ.com
by: Car­olyn T. Geer
Novem­ber 25, 2012

The squeeze is on for folks who rely on the tax code for relief from big med­ical bills. Start­ing next year, tax­pay­ers will only be able to deduct med­ical expens­es that exceed 10% of their adjust­ed gross income.

For years that thresh­old has stood at an already for­mi­da­ble 7.5% of income. (Peo­ple age 65 and old­er can keep using the old thresh­old through 2016.) The change affects tax­pay­ers who item­ize deduc­tions on Sched­ule A of the 1040 form instead of tak­ing the stan­dard deduc­tion.

At the same time, con­tri­bu­tions to flex­i­ble spend­ing accounts—which help cov­er out-of-pock­et med­ical costs on a pre-tax basis—will be capped by law at $2,500 per year (adjust­ed for infla­tion going for­ward). Pre­vi­ous­ly, employ­ers decid­ed how much employ­ees could con­tribute to these accounts.

The changes, enact­ed in 2010 to help fund the health-care over­haul, could hit aver­age earn­ers and the unemployed—or underemployed—hard.

High­er-income earn­ers have always had trou­ble clear­ing the hur­dle for the med­ical-expense deduc­tion because med­ical costs need to be a hefty per­cent­age of income to qual­i­fy. Those who owe the alter­na­tive min­i­mum tax are already sub­ject to the 10% thresh­old.

But ordi­nary tax­pay­ers shoul­der­ing high med­ical costs could feel the pinch.

Start­ing next year, some­one with $50,000 in adjust­ed gross income will be able to deduct only med­ical expens­es exceed­ing $5,000, up from $3,750 this year. That’s a loss of $1,250 in deduc­tions, for an effec­tive tax increase of near­ly $200, assum­ing mar­gin­al tax rates stick at 15% for this group.

Some­one with adjust­ed gross income of $100,000 will lose $2,500 in deduc­tions, caus­ing their tax­es to soar $600 or $700, again depend­ing on where mar­gin­al tax rates set­tle for next year.

“That is sig­nif­i­cant for some peo­ple,” says Thomas Savi­no, an accoun­tant in Need­ham, Mass.

The sit­u­a­tion is turn­ing tax plan­ning on its head.

Ordi­nar­i­ly, it makes sense to defer income-tax deduc­tions into years such as 2013, when like­ly high­er tax rates would make the deduc­tions more valu­able. “But if the deduc­tions them­selves become more lim­it­ed, they may be worth noth­ing to you next year,” says Ted Saren­s­ki, an accoun­tant and chief exec­u­tive of Blue Ocean Strate­gic Cap­i­tal, a finan­cial plan­ning and invest­ment advi­so­ry firm in Syra­cuse, N.Y.

Con­se­quent­ly, many advis­ers are espous­ing a bird-in-hand approach that involves accel­er­at­ing some med­ical costs into this year. “The advice we’re giv­ing to folks is to have as many things done today as you can,” says Mr. Saren­s­ki. This might include den­tal work, elec­tive surgery and any­thing not cov­ered, or not cov­ered ful­ly, by your health insur­ance.

It also might include buy­ing some extra sup­plies for an exist­ing, ongo­ing med­ical con­di­tion, such as dia­betes, or pre-pay­ing some costs you’re con­trac­tu­al­ly oblig­at­ed to pay, such as nurs­ing-home bills for an infirm senior or tuition bills for a dis­abled child.

In gen­er­al, you can’t deduct pay­ments made today for med­ical care to be pro­vid­ed “sub­stan­tial­ly” beyond the end of the year, accord­ing to the Inter­nal Rev­enue Ser­vice. How­ev­er, you can deduct part of a lump-sum life-care fee or “founder’s fee” paid to a retire­ment home—the por­tion allo­cat­able to med­ical expens­es.

And while you can’t write your doc­tor a $5,000 check this year to cov­er next year’s costs in gen­er­al and deduct it, says Mack­ey McNeill, an accoun­tant and finan­cial advis­er in Belle­vue, Ky., you can pay an insur­ance pre­mi­um cov­er­ing you through next April and deduct that.

Also, if you have a child or chil­dren get­ting braces, con­sid­er pay­ing the entire bill this year rather than in install­ments, says Mr. Savi­no. By front­load­ing, say, $6,000 of ortho­don­tia bills in 2012, a cou­ple with $100,000 in adjust­ed gross income could eas­i­ly exceed $7,500 in med­ical expens­es, after adding in the cost of eye­glass­es, insur­ance pre­mi­ums and the like.

Of course, before you start load­ing up on med­ical expens­es, make sure you have enough oth­er item­ized deduc­tions, such as mort­gage inter­est and state income tax­es, to trump tak­ing the stan­dard deduc­tion.

For 2012, the stan­dard deduc­tion is $11,900 for mar­ried cou­ples fil­ing joint­ly, and $5,950 for sin­gle tax­pay­ers.

The list of deductible med­ical expens­es is wide-rang­ing. For details about what’s deductible—and what isn’t—consult IRS Pub­li­ca­tion 502 at www.irs.gov.

—Email: investingbasics.wsj@gmail.com

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