Health insurance premiums and other medical costs are on the rise. If medical insurance does not cover all of your out-of-pocket costs, tax rules can help you minimize your financial exposure. However, as costs are rising, some tax breaks are shrinking. Here are some changes to note for 2013.
Starting in 2013, you can deduct medical costs not reimbursed by insurance or other plans only to the extent such costs exceed 10% of your adjusted gross income (AGI). This threshold is increased from 7.5% of AGI in 2012. However, those who are age 65 or older can continue to use the 7.5% threshold through 2016.
Long-term care costs
Premiums for long-term care insurance can be treated as medical expenses for purposes of the medical deduction. The amount of the premiums taken into account is limited according to your age at the end of the year.
|Age at year end||2012||2013|
|More than 40 but less than 50||$660||$680|
|More than 50 but less than 60||$1,310||$1,360|
|More than 60 but less than 70||$3,500||$3,640|
|More than 70||$4,370||$4,550|
Payments received under a long-term care policy are tax free when used to pay long-term care expenses. Periodic payments used for any other purpose are tax free up to a set dollar limit. This limit, which is $310 per day in 2012, will be $320 per day in 2013.
Your employer may give you the opportunity to contribute some of your wages to a medical flexible spending arrangement (FSA). The dollars you put in are not taxable to you. For example, if you earn $40,000 but choose to put $2,000 into an FSA, you’re taxed only on $38,000.
For 2013, the contribution limit is capped at $2,500. After 2013, this cap will be adjusted for inflation. The limit up until now was set by your employer.
Typically, now is the time for you to commit to the 2013 FSA. Remember that the plan continues to have a use-it-or-lose-it feature. If you don’t use up your account by the end of the year (or a grace period if your plan has one), you forfeit the contribution.
As health care insurance premiums and other costs continue to rise, you’ll likely have to pay more for health care. Use tax-favorable rules to help ameliorate the added cost by reducing your tax bill. But be sure to note that some of these rules are going to be less helpful after 2012.
For 2008 returns filed in 2009, the top 4 errors (in addition to incorrectly reporting the recovery rebate credit that only applied in 2008) that occurred most frequently were: calculating the tax, figuring the number and amount of exemptions, figuring the earned income tax credit, and reporting the standard deduction or itemized deductions.
Source: IRS Data Book 2009, Table 15View all factoids