Steven Merrell, Financial Planning: Planning for medical expenses

One of the most challenging aspects of financial planning is helping people prepare for medical expenses. People are anxious about the financial impact of medical bills. This is both an emotional and financial issue and it affects people at all levels of wealth. In the COVID-19 era, this sense of angst is even more pronounced.

These anxious feelings may be justified. Every year the Federal Reserve conducts a study of the economic well-being of American households. As part of the study, they ask how respondents would cope with an unexpected $400 expense. This year, 63 percent of adults said they would be able cover that expense with savings. While that’s an improvement from the 50 percent who could cover it in 2013, it still makes you wonder how many people could cover a much larger medical emergency. No wonder nearly two-thirds of personal bankruptcy filings are medically-related.With so much at stake, you can see why it makes sense to carefully consider medical expenses in your financial plan.

Most people are aware that qualified medical expenses are deductible once they rise above 10 percent of adjusted gross income. However, there are some nuances to this rule that need to be understood before you can apply it.

The threshold applies to a household’s tax return, not to an individual. That means the medical expenses incurred by you, your spouse and any dependents you claim can be added together to satisfy this requirement. Therefore, if you have a year with large medical bills that take you close to that threshold, really scour your expenses for any other qualifying expenses. Every dollar of every qualifying expense you can identify above the threshold amount will reduce your taxes by a dollar.

To claim someone as a dependent, they must meet the requirements of a “qualifying child” or a “qualifying relative.” We don’t have room in this column to get into the specific requirements, but they are detailed in IRS form 501, “Dependents, Standard Deduction, and Filing Information.” It’s available on the IRS website or, if you send me an email, I will send you a copy.

As you review your medical expenses pay attention to when payments are actually made. Medical deductions are generally taken in the year the medical expense is paid, not when the expense is incurred. As with everything, there are exceptions to this rule.

When you pay for a medical procedure with a credit card, the expense is deemed “paid” for tax purposes when you swipe the plastic, not when you pay the credit card bill.

Prepaid medical expenses are considered incurred when the procedure is performed, not when the prepayment is made.

Given the tangled web of our medical payments system, when you actually pay for a medical treatment can be very different from when you receive the medical treatment. Be aware of this difference and work to consolidate your medical payments as much as possible into a single tax year. Consolidating your payments will magnify the tax benefit you receive.

For example, it is not uncommon for a surgery to occur toward the end of a year to get covered under that year’s insurance deductible. However, by the time the insurance company sorts out how much you owe and how much they will pay, your payment could easily be delayed into the following year. If you can push payments for other surgery-related expenses into the following year, your deduction will be greater. Consolidating your payments into the following year will also help if your income is reduced for that year.

You should also remember that tax deductions are only available for expenses that are considered qualified under the tax code. Qualified expenses are generally related to “the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” However, they do not include most over-the-counter drugs or remedies.

Finally, many long-term care expenditures are considered deductible.  If a chronically ill person is receiving “necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services” as required by a licensed practitioner’s plan of care, those expenses are probably deductible.

Steven C. Merrell is an investment adviser and partner at Monterey Private Wealth Inc., in Monterey. Send questions concerning investing, taxes, retirement or estate planning to Steve Merrell, 2340 Garden Road Suite 202, Monterey 93940 or

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