Taxpayer asks:

Taxgirl,

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,


Taxgirl says:

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.

Good luck!

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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Author

Kelly Erb is a tax attorney and tax writer.

6 Comments

  1. Wouldn’t there be another way to tap into Dupont’s health care savings plan so that all monies paid for medical expenses would be tax free?

    I work for a large telecommunication company and they have a health care savings plan that is deducted from each paycheck (pre-tax) bi-weekly and goes into an account that can be used to pay for medical expenses (and never expires – carries forward each year). Certainly Dupont may have this type of benefit as well but perhaps ‘Taxpayer’ can look into this avenue as well.

    In my opinion the tax code for medical expenses is very limited to who can benefit and really only benefits low income folks (that typically cannot afford to pay their med bills) or older people with no income.

  2. That’s a good idea! My gut is that the taxpayer is not eligible for the plan because he is a retiree – but I don’t know how DuPont manages their HSAs.

    But you make a great point – taxpayers who work for mid to large companies should investigate HSAs for assistance with medical expenses! A bit more info here: http://www.taxgirl.com/7-ways-to-save-on-your-taxes-now/

  3. Wayne Phillips Reply

    Pensioners generally do not have the resources of today’s workers. HSA came into being as an alternative to large companies trimming benefits and are for current employees.
    DuPont offers HSA’s but as with all large corporations, the bottom line is the driver. The employee carries the burden of financing the HSA. The company is only a vehicle to collect from the employee. Usually all the rest is either between a contracted company and the employee.
    DuPont recently announced the end of their company paid pension for future employees hired after 2006. 401K’s are now the method for retirees to prepare for the future. Some companies such as GM have announced they will no longer contribute to their employees 401K. DuPont websites are ablaze with that possibility as DuPont has never missed a dividend. One pensioner said to current employees, “Be not surprised, as when it comes to paying the dividend, DuPont management will throw employees under bus first”.
    Medical packages were a promise DuPont made to their new hires for over fifty years. That changed in the mindset of global economy in management of large companies. Now large companies that continue to offer their pensioners medical coverage, play the role of medical provider when paying medical claims. In doing so they assume the role of medical provider, which most professional medical providers decry as “practicing medicine without a license”.
    According to the DuPont blog website, many pensioners are concern that DuPont will raise the premiums so high, and make payment of claims so burdensome, pensioners must seek medical coverage elsewhere.

    A warning to those between 25 and 50. Take a look at your future needs as you approach your retirement age. Companies offer fewer if any benefits, maybe stop contributing to your 401K altogether, no pension, and possibly no medical coverage after you turn 65, regardless if you retire or not. Several local banks in NC have notified their employees this very issue, no medical coverage after 65, or when you leave your employment.

  4. Hi Kelly,

    Just wanted to say that I’ve started reading your blog. I’m wondering if you have heard about the book, “What Men Don’t Tell Women About Business”. I heard the guy (Chris Flett) on the Today Show and thought you probably have already heard of him. I’m wondering what your thoughts were. He seems to be really taking on the ‘Old Boys Club”. I just emailed him, but haven’t heard back.

    Anyway, keep up the great writing.

    Best,

    Bihter.

  5. Hi Kelly,

    I’ve been doing some additional research on the author, Chris Flett, that I talked about on my last comment. His company is “GhostCEO” (www.GhostCEO.com) and his book is a bestseller. I found it on Amazon here. Anyway, he was in the NY Times last Sunday under the “Career Couch” and he makes reference to women’s blogs like yours so I thought you might like to connect. I’d like to see you interview him and see what he’s all about. I saw on another blog he was a guest blogger. His email is: chris@ghostceo.com

    Best wishes,

    Bihter.

  6. thanks for the info, how do you calculate the supplies us for resume when resumes are faxed and emailed? do you have to have receipts.

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