Tax Tip Tuesday 4: Itemized Deductions
Outside of the change in the standard deduction, the changes in itemized deductions will impact a substantial group of taxpayers. For many taxpayers, itemizing or claiming expenses incurred in certain areas, was a significant way of reducing your federal income tax liability. The categories of itemized expenses are; medical and dental expenses, taxes paid, interest paid, gifts to charity, casualty, theft losses, and job expenses and certain miscellaneous deductions. If the combination of these expenses exceeds the amount of the applicable standard deduction, the excess is added to the standard deduction amount and lowers your taxable income. As mentioned in an earlier post, while deductions reduce your taxable income (the income on which taxes are calculated), tax credits actually reduce the taxes that have been calculated. Each category of itemized deductions has been altered to some extent by the changes. Qualifying items have changed, ceilings and floors have been increased or decreased, some changes are retroactive while others take effect in future tax periods and some areas have been eliminated altogether.
Medical and dental expenses remain available as an itemized deduction, but the floor (the percentage of your AGI income, that your expenses must exceed) has been lowered from 10% to 7.5% of your AGI. Assuming a $50,000 AGI, with $6,000 in qualified medical and dental expenses, under the prior code the amount your deductible would be $1,000 ($6,000 less $5,000). Under the new code, your deductible would calculate to $2,250 ($6,000 less $3,750). This change in medical and dental expenses is one that is retroactive and was in effect for the 2017 tax year.
Medical and dental expenses include payments made for diagnosis, cure, mitigation, treatment, or prevention of disease, and treatments affecting any structure or function of the body. Some examples include fees to doctors, dentist, surgeons, chiropractors, psychiatrist, psychologists, and nontraditional medical practitioners. Payments for inpatient hospital care or residential nursing home care (if due to unavailability of medical care), fees for meals and lodging may be included.
Of course, all payments must be made in the tax year and offset by any insurance proceeds. Insurance premiums paid by you directly are deductible, while premiums paid through your employers’ group plan are generally not. These payments, in most cases, are classified as a non-taxable employee benefit and not included as income on your W-2 for tax purposes.
Along with the increase in the standard deduction and the changes in itemized deductions, the opportunity to use itemized deductions as a whole to reduce taxable income may be diminished, but there are still some opportunities.