Ask the taxgirl: Medical Expenses and Income Adjustments

Taxpayer asks:

Dear Ms. Erb,

I’m confused by part of the notice I got from the IRS about my 2010 taxes. The first part was clear – I apparently never got a tax form for some interest so didn’t declare it, and I have no quarrels about paying the tax plus penalty on that. However, the second part said I deducted $73 too much for medical expenses. While I paid what they asked for (not worth fighting over and risking an audit), I don’t understand how they could decide that $73 of my deduction was unreasonable, given that they had no evidence one way or another.

So my question is: how does the IRS decide that someone’s deducted too much for medical (or anything else)?

Thank you for your interesting and very readable posts.

taxgirl says:

Occasionally, the IRS can make a determination that your expenses are too high based on your income. It happens. Check out this story about the woman the IRS decided was “too poor” to support her own children.

But usually, the IRS sends you a notice asking for more support (documentation, for example) before they ding you. So I’m guessing that’s not what happened here. Instead, I’m going to take a guess that your interest adjustment was in the neighborhood of $1000. Medical expenses are subject to a floor of 7.5% of your AGI (adjusted gross income) – that means that you can’t deduct expenses below that floor. If the IRS makes an adjustment to your AGI, bumping it up, it also bumps your AGI. If your 1099-INT bumped your AGI up by $1000, then your floor for purposes of the medical expense deduction also rose proportionately. That would mean that you wouldn’t be able to claim medical expenses below that new number.

Here’s an example:

Scenario #1. You have medical expenses worth $5,000. Your AGI is $20,000. Your floor, for purposes of the medical expenses deduction is $1,500 (7.5% of $20,000). You can take a deduction of $3,500, or $5,000 in expenses less the $1,500 floor.

Scenario #2. Your medical expenses remain $5,000. Your AGI is $1,000 more, or $21,000. Your floor, for purposes of the medical expenses deduction is now $1,575 (7.5% of $21,000). You can take a deduction of $3,425, or $5,000 in expenses less the $1,575 floor.

That’s the difference. Make sense?

Tax returns are pretty complicated – especially when you’re itemizing and claiming medical expenses. One adjustment can affect a slew of other deductions and the like. Read those notices carefully to make sure that all of the calculations are applied correctly.

Be sure to read my disclaimer… Remember, I’m a lawyer and we love disclaimers. But you know who loves them more? My malpractice carrier. Consider yourself warned.

If you still have a question, check out these tips before you “ask the taxgirl.”

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