Don’t overlook the expanded tax deduction for medical expenses

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If you’re one of the estimated 43 million Americans with a retirement or brokerage account, the Securities and Exchange Commission wants to hear from you.

The federal agency on Wednesday proposed a regulatory package that puts a bull’s eye on conflicted investment advice given to retail investors by brokers. The SEC is seeking input from the public on its proposed rules. (Those can be found here.)

The three-part proposal, which comes with a longer-than-usual public comment period of 9

Even if you’re scrambling to get your taxes done, it might be worth taking some time to tally up your 2017 medical expenses.

The result could be a tax break.

A temporary expansion of the medical-expense deduction — coupled with ever-increasing health costs — could translate into a writeoff, even if you haven’t been able to use it in the past.

“I’d say if you earn $150,000 or less, there’s certainly a chance you could benefit from your medical expenses,” said Bill Smith, managing director at CBIZ MHM’s National Tax Office in Washington. “And anyone with extraordinary expenses should check, too.”

The ability to pay for health-care needs is one of the most critical issues of retirement.

Hero Images | Getty Images
The ability to pay for health-care needs is one of the most critical issues of retirement.

As long as you itemize your deductions instead of taking the standard deduction, out-of-pocket medical expenses that exceed 7.5 percent of your adjusted gross income — your earnings minus certain adjustments — could be deductible for both 2017 and 2018.

In 2019, that floor will jump to 10 percent, which is where it previously was for most taxpayers.

To illustrate the difference this temporary drop can make: A taxpayer with adjusted gross income of $50,000 would need a minimum of $3,750 in medical expenses to reach the 7.5 percent threshold. That compares with $5,000 — $1,250 more — at a 10 percent floor.

The cost of health care has been on an upward trajectory for years. In 2016, the average amount spent on health care per person was $10,348, according to the Centers for Medicare and Medicaid Services. That’s up from $9,596 in 2012 and $7,700 in 2007.

While not all of the costs are necessarily borne by taxpayers — i.e., your employer might pay a share of your health insurance premiums — many out-of-pocket expenses count toward the deduction (more on that below).

Most of the value of the tax break goes to middle-income taxpayers, based on the 2016 average per-person health-care expenditure (see chart for illustration).

In 2015, about 8.8 million Americans used the tax break, saving themselves an aggregate $86.9 billion, according to the AARP Public Policy Institute. The research also shows that 49 percent of taxpayers who took the deduction had income below $50,000 and 69 percent earned less than $75,000.

Lower threshold, higher deduction value

Adjusted gross income (AGI)
Average medical expenditure (2016)
10% of AGI
7.5% of AGI
Amount deductible at 10% threshold
Amount deductible at 7.5% threshold
Additional value at lower threshold
$25,000 $10,348 $2,500 $1,875 $7,848 $8,473 $625
$50,000 $10,348 $5,000 $ 3,750 $5,348 $6,598 $1,250
$75,000 $10,348 $7,500 $5,625 $2,848 $4,723 $1,875
$100,000 $10,348 $10,000 $7,500 $348 $2,848 $2,500
$125,000 $10,348 $12,500 $9,375 $973 $973
$150,000 $10,348 $15,000 $11,250
Source: Bill Smith, CPA, Managing Director for CBIZ MHM’s National Tax Office

Be aware that although the lower threshold is in place for 2018, the standard deduction has nearly doubled for all taxpayers beginning this year. For example, the amount for married couples filing jointly is $24,000 for 2018, up from $12,700 in 2017.

This means it’s less likely that itemizing will give you a bigger tax break than the standard deduction when you go to file your tax returns a year from now.

For your 2017 returns, it’s worth exploring the IRS list of qualifying expenses. Although some health outlays might be obvious contenders — i.e., copays, prescription costs — others are more likely to be overlooked.

0 days, aims to mitigate conflicts of interest as well as investor confusion over the standards that different financial professionals are held to.

 “The SEC always wants to hear from people when it proposes rules, whether individuals, industry groups or firms. But this is of particular importance,” said Jim Lundy, a partner with law firm Drinker Biddle in Chicago.

At issue are the different legal obligations that brokers and registered investment advisors have when they give investment advice.

The latter must meet a fiduciary standard, which means they must put their clients’ interests ahead of their own. Brokers, on the other hand, currently must meet a less-stringent suitability standard that requires them only to ensure a recommended investment is appropriate.

“The commissioners are trying to address those different standards,” Lundy said.

However, he points out that the SEC’s proposals do not create a uniform standard that both brokers and investment advisors would have to adhere to. Instead, it would add requirements to the suitability standard that fall short of the fiduciary mandate imposed on investment advisors.

Broadly, these are the SEC’s proposals:

1. “Regulation Best Interest” rule: When making an investment recommendation, brokers would be required to act in the best interest of the client. This would mean not putting their own interest — financial or otherwise — ahead of the investor.

However, as long as the brokerage meets certain requirements — including making disclosures about conflicts and working to mitigate or eliminate them — the best-interest mandate would be met.

2. Relationship-summary form: This would be a standardized disclosure form applying to both brokers and investment advisors. It would include services offered, fees and conflicts of interest.

Notably, it would restrict certain brokers from using the term “adviser” or “advisor.” Use of the term can mislead investors into thinking the professional (or the firm) is a registered investment advisor and therefore subject to a fiduciary standard.

This part of the proposal comes with a section specifically geared toward retail investors that solicits their input on these relationship-summary forms.

3. Investment advisor interpretation: Basically, this would reaffirm and clarify certain aspects of the fiduciary duty that registered investment advisors have to their clients.

The SEC’s move comes about a month after the Labor Department said it was backing off enforcement of its existing so-called fiduciary rule due to a court ruling.

In that case, a federal appeals court determined the agency had overstepped its authority by creating the rule, parts of which took effect last year. That rule requires any financial advisor providing investment advice for retirement accounts to meet a fiduciary standard.

However, the court’s ruling and the Labor Department’s lack of enforcement essentially render it ineffective for now.

“Investors can help … by clearly communicating to the commission what they think a best-interest standard should mean.”-Barbara Roper, Director of investor protection for the Consumer Federation of America

Meanwhile, Barbara Roper, director of investor protection for the Consumer Federation of America, said the biggest problem with the SEC’s new set of floated changes is that “best interest” is not defined, despite it being the name of the proposed rule targeting brokers.

“It doesn’t even clearly require brokers to compare available investment options, let alone recommend the available option that is the best fit for the investor,” Roper said. “Absent that requirement, it would be confusing, if not misleading, to call this a best-interest standard.”

She added, “Investors can help fix that problem by clearly communicating to the commission what they think a best-interest standard should mean.”

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