From 1986 until 2013, the rules for deducting medical expenses remained unchanged. Expenses were only deductible to the extent that they exceeded 7.5% of a taxpayer’s adjusted gross income (AGI). This resulted in a tax deduction for only a small percentage of taxpayers with high medical expenses. One of the provisions of the Affordable Care Act (ACA) was to increase the AGI hurdle for a medical expense deduction from 7.5% to 10% for all taxpayers under the age of 65 starting in 2013. All taxpayers over the age of 65 still only had to meet the 7.5% hurdle until 2017, when it changed to 10% for them as well.
However, in one of the few retroactive measures in the new law, the AGI hurdle for medical expenses for all taxpayers has been lowered back to the previous 7.5% beginning in 2017. This rate only stays in effect until 2019, when all taxpayers revert to the 10% hurdle.
As if that wasn’t confusing enough, there have also been major changes to itemized deductions under the new law that will affect the deduction of medical expenses. A taxpayer only benefits from medical expense deductions if they claim itemized deductions for taxes. As of January 1, 2018, the standard deduction for taxpayers nearly doubled (to $12,000 for single and $24,000 for married filing jointly) which will result in far fewer taxpayers claiming itemized deductions and, therefore, far fewer taxpayers claiming medical expenses.
To be fair, that isn’t as bad as it sounds. A taxpayer that would have deducted medical expenses by claiming itemized deductions under the old rules still comes out ahead even if they claim the standard deduction and can’t itemize under the new rules.
Put simply, the new law will allow more taxpayers to take the benefit of medical expense deductions in 2017, but it will benefit fewer starting in 2018, and going forward from 2019, only those taxpayers with very high medical expenses will see any difference in their federal taxes.
Michael Anderson, CPA