It’s that time of year when you need to make sure you have all the information and documentation required to file your 2021 taxes. If you received any reimbursements, there are things you need to know because they may affect your tax filing. You will need to determine if itemizing is better than the standard deduction. I will be concentrating only on medical expenses since it can be the bulk of your items. There are others, but I suggest you speak to your tax professional for questions pertaining to your specific situation.
It is estimated that approximately only one-third of taxpayers have taken advantage of itemizations in the past. Perhaps it’s because filing the regular deduction makes filing easier. However, tax-filers may be missing a huge opportunity to reduce tax liability by not itemizing. Additionally, many may be missing tax credits that may be available, especially in light of the many credits that were extended from the federal government this past year.
If you’re unsure whether you should itemize or take your standard deduction, consider having it calculated both ways. Also consider filing as individuals even if married. This may be especially helpful if one person has a lot of medical bills. I know this can be tedious but it is well worth the effort.
It would be very valuable for you to itemize if your itemizable deductions are greater than your standard deduction. If you itemize your deductions for the 2021 tax year, you may be able to deduct expenses you paid for medical and dental care for yourself, your spouse and your dependents. And you can only deduct the amount of your total medical expenses that exceed 7.5% of our adjusted gross income (AGI). Be aware that your state may have a different threshold for AGI. It may be lower or higher which will affect your tax liability. Also, in some states you may not get a break on the Federal income taxes but you may on state taxes. These expenses include payments you made out-of- pocket for the diagnosis, cure, mitigation, treatment or prevention of disease, or payments for treatment affecting any structure or function of the body.
Deductible medical expenses may include but not necessarily limited to the following:
Remember adjustments to income are always valuable. And they reduce your taxable income and generally arise from your expenses. These could include adjustments such as contributions to Individual retirement account's, Health savings account’s (HSA), Flexible spending account’s (FSA), and Medical Medicare savings account’s (MSA). The money in HSA’s and MSA’s grows tax-free and withdrawals for qualifying medical expenses are not subject to income tax. You participate in an FSA through payroll deduction. This comes out pre-tax thereby reducing your taxable income. Contributions can be made by both employers and employees. When used to pay for qualifying medical expenses it escapes both income and Social Security taxes.
Credits reduce your tax directly as opposed to reducing your taxable income. Making it more valuable than a deduction of the same amount. An example of this is the Economic Impact Payments and Claiming the Recovery Rebate and the Child Tax Credit. They are a dollar-for-dollar reduction of the income tax that you owe.
An area of great concern to patients who acquire assistance from non-profits for co-pays deductibles, insurance premiums, pharmacy assistance programs or State benefit assistance programs is how it affects their tax liability.
These grants are not deductible on your taxes and are not considered as income to you. They also are not counted toward your deductible for Medical or prescription Insurance. You will need to subtract the reimbursed amount from your actual out of pocket amount that you paid to come up with the specific itemizable dollar amount. (Remember it must be more than 7.5% of your AGI).
In regard to withdrawals from retirement plans before age of 59 ½ and if not used for qualifying medical expenses, you will incur a 10% early withdrawal penalty and pay taxes on the portion you withdrew. However, if you withdraw from a retirement plan prior to age 59 ½, to the extent you have qualifying medical expenses, the 10% penalty is waived as long as it is noted by the administrator of the plan and coded accordingly at the time of the withdrawal request. You are still responsible for taxes for the withdrawn amount.
It is very important to keep accurate records of your receipts for any of your medical expenses. Ask your pharmacy, your medical provider, labs, etc., for a list of your paid receipts.
Review your credit card if you paid for travel or lodging for medical care. Consider keeping a folder in your car to keep your records in. But please be aware that many receipts fade over a short period of time. Make copies on regular print paper for added document protection.
Again, I did not include all medical expenses that may qualify for itemizable deductions, only the ones that might be most important to you. Refer to the irs.gov website for all medical expense deductibles and other deductibles outside of the medical costs that you may be able to realize.
For the year going forward, keep good records and remember to save all receipts so nothing falls through the cracks. This is also a great way to organize your medical bills and will give you a good reading in regards to the medical insurance plan in which you are currently enrolled. Consider it a way to determine if you need to change plans in the next enrollment period.
about the author
Diahanna is the Financial Program Manager for the HealthTree Foundation. She specializes in providing financial help, resources and education for multiple myeloma patients. As a professional financial consultant and former caregiver of her husband who was diagnosed with multiple myeloma, Diahanna perfectly understands the financial issues facing myeloma patients.