Tax Planning for a Major Illness or Injury
You can lighten your tax burden if you or a dependent faces a costly health issue.
Fighting a major illness or injury can be enormously expensive, but you can find some help in the tax law.
Although everyone knows medical expenses are deductible, in truth very few taxpayers actually get to deduct them. The catch? You must itemize deductions to write off medical expenses, and only about 25% of taxpayers itemize. And, such costs are deductible only to the extent they exceed 10% of your adjusted gross income (AGI). (The threshold is 7.5% of AGI for taxpayers age 65 or older; on a joint return, if either spouse is 65, the lower threshold applies.) With the 10% threshold, if your AGI is $100,000, the first $10,000 of unreimbursed medical expenses don't count. If you, your spouse or your dependent children are facing a major illness or injury, however, you may well surpass the threshold. If that’s a possibiity, be sure you tote up all your qualifying expenses.
HSA and MSA Distributions
If you have a health saving account or an Archer Medical Savings Account, withdrawals used to pay qualifying medical expenses are tax-free.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Flexible Spending Account
Generally, employees are allowed to adjust the amount of salary earmarked for a medical reimbursement account only once a year. If during your open-enrollment season you anticipate higher medical bills in the year ahead, consider increasing the amount of money you set aside. Salary diverted into a reimbursement account and then used to pay medical bills escapes both income and Social Security taxes.
You can put up to $2,550 a year into a medical flex plan. A $2,550 set-aside that avoids a 25% federal income tax rate and the 7.65% Social Security and Medicare tax would save you more than $800. Any state tax savings would make this an even better deal. In the past, flex plans came with a use-it-or-lose-it proviso. Any funds left unspent at the end of the calendar year (or March 15 of the following year in some cases), was forfeited. Now, companies can (but don’t have to) allow up to $500 of unspent funds to rollover into the next year. Make sure you understand how your company’s plan works.
IRA and 401(k) Plan Payouts
Although using retirement funds for anything other than retirement is generally discouraged, crushing medical bills could force you to tap your account. If you tap a traditional IRA before age 59½, the 10% penalty that normally applies to payouts before age 59½ is waived to the extent that you have qualifying medical expenses in excess of 10% of AGI (7.5% if you are age 65 or older).
The same goes for early withdrawals from 401(k)s, although such withdrawals are difficult to make if you are still on the job. "In service" withdrawals are only allowed if you can meet hardship requirements. If you have left the job in a year in which you were age 55 or older, the 10% penalty doesn't apply regardless of the 10% rule. Even if you avoid the penalty, your IRA or 401(k) withdrawals will be taxed as income.
Disability Insurance Payments
If your condition results in your receiving benefits under a disability insurance policy, the taxability of the income depends on who paid for the policy. If you paid, the benefits are tax-free. If your employer paid for the insurance, the benefits are fully taxable.
Damages
If you receive a settlement in a lawsuit that includes money for medical expenses you deducted in an earlier year, that amount is considered taxable in the year you receive it . . . but only to the extent that the deduction actually reduced your taxable income for the year you wrote off the expenses. If a settlement includes funds for future medical expenses, the amount is not taxable. Those future medical expenses aren't deductible either, until they exceed the amount of the award allocated to future medical care.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Try the 6 to 1 Grocery Shopping Method to Save Time and Money
The 6 to 1 Grocery Method can help you save money, reduce waste and eat healthier.
By Erin Bendig Published
-
Ford Stock Plunges on Earnings Miss: What to Know
Ford stock is down big Thursday after the automaker fell short of earnings expectations for its second quarter. Here's what you need to know.
By Joey Solitro Published
-
403(b) Contribution Limits for 2024: Good News for Teachers
retirement plans Teachers and nonprofit workers can contribute more to a 403(b) retirement plan in 2024 than they could in 2023.
By Jackie Stewart Last updated
-
Roth IRA Contribution Limits for 2024
Roth IRAs Roth IRA contribution limits have gone up for 2024. Here's what you need to know.
By Jackie Stewart Last updated
-
Four Tips for Renting Out Your Home on Airbnb
real estate Here's what you should know before listing your home on Airbnb.
By Miriam Cross Published
-
Five Ways to a Cheap Last-Minute Vacation
Travel It is possible to pull off a cheap last-minute vacation. Here are some tips to make it happen.
By Vaishali Varu Last updated
-
How to Figure Out How Much Life Insurance You Need
insurance Instead of relying on rules of thumb, you’re better off taking a systematic approach to figuring your life insurance needs.
By Kimberly Lankford Last updated
-
When Is Amazon Prime Day?
Amazon Prime Amazon Prime Day 2024 runs Tuesday July 16 and Wednesday July 17, marking the 10th Prime Day event.
By Bob Niedt Last updated
-
How to Shop for Life Insurance in 3 Easy Steps
insurance Shopping for life insurance? You may be able to estimate how much you need online, but that's just the start of your search.
By Kaitlin Pitsker Published
-
Five Ways to Shop for a Low Mortgage Rate
Becoming a Homeowner Rates are high this year, but you can still find an affordable loan with these tips.
By Daniel Bortz Last updated