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Turn support into deductible medical expenses

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in Small Business Tax,Small Business Tax Deduction Strategies

Beginning next year, it will be even tougher for most taxpayers under age 65 to claim medical expense deductions. Therefore, if you expect to qualify for a deduction this year, it’s time to go for broke.

For instance, suppose you already help support a relative like a parent, in-law or favorite aunt or uncle.

Strategy: Pay the relative’s medical expenses. Even though you don’t meet all the requirements to claim the relative as a tax dependent, you still may be able to add the medical payments onto your total medical expenses, thereby increasing the deduction.

For 2012, you can deduct unreimbursed medical expenses above 7.5% of your adjusted gross income (AGI). The AGI floor is raised to 10% in 2013 for anyone who is under age 65.

Here’s the whole story: To claim a dependency exemption for a relative, you must provide more than half of his or her support and the relative can’t have more than the personal exemption amount ($3,800 for 2012) in gross income. For medical deduction purposes, however, you don’t have to pass the “gross income” part of the test.

Example: Your aunt Jane receives $10,000 in Social Security benefits and $4,000 of taxable investment income a year. Since you give her $1,250 a month for rent—for an annual total of $15,000—you already provide more than half of her support ($15,000 vs. $14,000). But you can’t claim her as a dependent because her gross income exceeds $3,800.

Jane has a $1,000 medical expense this month. She intends to pay it out of her investment earnings.

Better idea: Pay the $1,000 doctor’s bill for Jane. Either reduce your monthly rent outlay by $1,000 or, if you can afford it, add it to your ongoing support (or somewhere in between). Now you can include the $1,000 payment in your medical expense calculation. This may put you over the top for a deduction in 2012 or increase an existing one.

Tip: Although Jane can’t deduct the medical expense, she may not qualify for a deduction anyway. Plus, the deduction is more valuable to you in your high tax bracket than it is to her.

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