Changes to Medical and Dental Expenses

The Consolidated Appropriations Act, 2021, includes changes to tax benefits for medical expenses. The Act provides for a permanent reduction in the medical expense deduction threshold from 10% to 7.5% of adjusted gross income. The ACT also provides an additional one-year extension of time for the credit for health insurance costs of eligible individuals after December 31, 2019 and before January 1, 2022.

Medical deductions. Individuals can claim an itemized deduction for costs related to eligible medical and dental care for themselves, their spouse, or their dependents. Only qualified expenses may be included, and a minimum threshold must be met for the deduction to be allowed. A reduced 7.5% threshold has been made permanent by the Consolidated Appropriations Act, 2021.

Qualifying medical expenses. In order to be eligible for the medical expense deduction, an individual’s expenses must be paid for medical care. Expenses for medical care include payments for medical or dental services, prescribed medicine and drugs, insulin, medical equipment and supplies, medical insurance premiums, transportation needed to get medical care, and many other medical-related expenses. Although capital expenditures for home improvements and similar items are generally not deductible, if the purpose of a capital expenditure is for the medical care of an individual or the individual’s spouse or dependents, the cost can be deductible.

Health Coverage Tax Credit (HCTC). Eligible individuals are allowed a refundable tax credit based on the amount they pay during eligible coverage months for qualifying health insurance coverage for the eligible individual and any qualifying family members. The credit amount is equal to 72.5% of qualified health insurance premiums. This HCTC is available only to (i) individuals who receive trade adjustment assistance (TAA) or TAA alternative payments, and (ii) retirees who are age 55 or older and receive benefits from the Pension Benefit Guarantee Corporations (PBGC). The credit is not available to unemployed individuals who pay for health insurance under COBRA, unless they fall into one of these two narrow categories.

The health coverage tax credit is extended by the Consolidated Appropriations Act, 2021 for all coverage months beginning in 2021. With the extension of the HCTC for 2021, participants may be able to work with their vendors or providers to be placed back on health coverage that qualifies for the HCTC and either re-enroll in the HCTC Advance Monthly Program or claim the HCTC on their annual Federal income tax return filed next year.

Please contact the Crosslin tax team at (615) 320-5500 if you would like assistance on reviewing your individual income tax situation to understand how you may benefit from these tax changes that apply to medical costs.  We are here to help!