This Tax Deduction Could Lead to Big Savings

At the end of December 2020, Congress passed a large spending bill addressing many of the problems we faced in the last year. For taxpayers, one aspect of that bill might hold promise in lowering income tax liability, both now and for many years to come. In response to the ongoing crisis of rising medical spending, Congress extended an important tax deduction, making it permanent.

Previously, taxpayers could deduct out-of-pocket (not covered by health insurance) spending that exceeded 7.5 percent of their gross income. So for example, a taxpayer with an adjusted gross income of $100,000 could deduct all medical expenses that exceeded $7,500 in a particular year.

That 7.5 percent threshold was set to increase to 10 percent in 2021, according to rules set forth by the Affordable Care Act. For many taxpayers, especially retirees, the rule change would have cost them a significant portion of this important deduction. Fortunately, Congress did recognize the need to address healthcare costs, and the spending bill passed in December extended the 7.5 percent threshold permanently.

For many of us, retiring means living on a lower income than we previously earned during our working years. But at the same time, the over-60 crowd tends to incur more out-of-pocket medical expenses than ever before. While the tax guidelines don’t allow for a complete deduction of these expenses, keeping the threshold at 7.5 percent should help many retirees manage their budgets.

Of course, budgeting for medical expenses in retirement ahead of time is just as important. Meet with us regularly as you strategize your retirement income, and we can help you identify ways to manage these expenses along with your budget in general.