I have been in dispute with my former employer DuPont who provides my retirement medical benefits. As DuPont is self-insured, they use AETNA to administer their retirees’ medical plan. For many that is an Indemnity plan. After many appeals and denial of payment, I am in the process of paying a substantial bill to the local hospital. Not able to pay this large sum at once as it would deplete my resources, which haven’t been depleted already by the greedy money managers of the country, I am making monthly installments. Some will be paid in 2008, the rest in 2009. As I itemized my income tax, what tax years do I list these for a surgery in 2007?
A retiree not enjoying the Golden Years,
First of all, I am sorry to hear that DuPont and Aetna have not been able to resolve your medical and insurance issues.
The good news is that you can generally deduct payments for qualified medical expenses – in this case, those payments made to the hospital for your care. For a list of qualified expenses, see my prior post on the subject.
Keep in mind that you can only deduct those medical expenses that you pay for yourself, your spouse and your dependents.
As for timing, you may only deduct the medical expenses that you paid during the tax year. It does not matter when the services were provided. In other words, payments made in 2008 should be figured when calculating your 2008 taxes and payments made in 2009 should be figured when calculating your 2009 taxes.
It’s worth noting that some taxpayers choose to pay off such expenses with a credit card, thus taking the entire deduction in one year even though it’s paid to the bank over time. Remember that your deduction is limited to medical expenses which exceed 7.5% of your adjusted gross income (AGI), so depending upon your personal circumstances, it may be advantageous to try and pay the amount in one year in order to claim the deduction.
Here’s a quick example: Let’s say the hospital bill is $5,000 and your other qualified medical expenses for the year total $2,000. If your AGI is $50,000, you would be limited by the 7.5% floor, or $3,750 ($50,000 x 7.5% = $3,500). Since your medical expenses total $7,000, you would claim the excess of your expenses over the floor. In this case, $3,250. The math is:
$7,000 medical expenses – $3,750 floor = $3,250 deduction claimed on Schedule A.
It’s one of the quirky bits of the Tax Code. The more your AGI, the higher your floor is for deducting medical expenses. If your AGI is $100,000, with the same set of facts as above, you would have no deduction. The math is:
$7,000 medical expenses – $7,500 floor ($100,000 x 7.5%) = -$500, meaning no deduction. There is no “carry forward” for medical expenses.
Whether to pay out in one year versus over a number of years varies from person to person depending on your income and your financial situation. If you’re not sure, ask your tax professional to run the numbers for you to see what works best in your situation, keeping in mind that you should not enter into an agreement that doesn’t make fiscal sense just for tax reasons. In other words, if you’re in a 20% tax bracket and you charge your medical expenses on a credit card with a 30% interest rate, you haven’t saved anything, have you? Keep in mind the 7.5% floor when running those calculations!
Of course, if you receive any relief from DuPont or Aetna, your total medical expenses for the year must be reduced by any reimbursement. It does not matter if you receive a reimbursement or if the reimbursement is paid directly to the hospital.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl!
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