Before you file your 2019 taxes, be sure you’ve read up on how new tax laws could impact your return this year. We chatted with our friends at Harper and Company CPAs Plus to compile a list of key details, including information about the Appropriations Act of 2020, medical AGI limitations, commonly overlooked deductions, deductible health insurance, and above-the-line health insurance deductions for self-employed individuals.
In December 2019 President Trump signed into law the Appropriations Act of 2020, which included several tax laws changes that will impact a large number of taxpayers and extended certain tax provisions that expired after 2017 or were about to expire.
For the 2019 and 2020 tax years, medical expenses will be deductible if you itemize and those expenses are greater than 7.5% of your adjusted gross income (AGI). That minimum was scheduled to increase to 10% this year, but Congress maintained it at 7.5%, which allows more taxpayers to qualify for the medical deduction. Keep in mind that the total of the itemized deductions must exceed the standard deduction before the itemized deductions will provide a tax break. So, even if your medical deductions exceed the 7.5% floor, that doesn’t necessarily mean you’ll have a tax benefit from them.
To help you maximize your medical deductions, here are some medical expenses that are commonly overlooked when itemizing your deduction:
As a tax tip, if you are self-employed you may be able to deduct 100% (no 7.5%-of-AGI reduction) of the cost of medical insurance without itemizing your deductions. This above-the-line deduction is limited to your net profits from self-employment. If you are a partner who performs services in that capacity and the partnership pays health insurance premiums on your behalf, those premiums are treated as guaranteed payments that are deductible by the partnership and includible in your gross income. In turn, you may deduct the cost of the premiums as an above-the-line deduction.
No above-the-line deduction is permitted when the self-employed individual is eligible to participate in a “subsidized” health plan maintained by an employer of the taxpayer, the taxpayer's spouse, any dependent, or any child of the taxpayer who hasn't attained age 27 as of the end of the tax year. This rule is separately applied to plans that provide coverage for long-term care services. Thus, an individual who is eligible for employer-subsidized health insurance may still deduct long-term care insurance premiums, as long as he or she isn't eligible for employer-subsidized long-term care insurance. In addition, for the insurance to be treated as subsidized, 50% or more of the premium must be paid by the employer.
This above-the-line deduction is also available to more-than-2% S corporation shareholders. For purposes of the income limitation, the shareholder’s wages from the S corporation are treated as his or her earned income.
The above-the-line deduction includes the premiums you pay for health coverage for yourself, your dependents, and your spouse, if applicable, for the types of plans listed under “Health Insurance Premiums” above.
Note: Please review these changes and any questions regarding your unique tax liability, especially as it relates to your medical itemized deductions or the self-employed above-the-line-deductions for health insurance premiums, with your accountant or tax specialist.
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