Itemized Medical Deductions
Before this year, you could claim itemized deductions for medical expenses paid for you, your spouse, and your dependents to the extent those expenses exceeded 7.5% of your adjusted gross income (AGI). But the rules have changed for the worse in 2013 and beyond.
Due to the 2010 Affordable Care Act, the old 7.5%-of-AGI hurdle is now 10% for most taxpayers in 2013. An exception applies for taxpayers, or their spouse if married, who are age 65 or older on December 31. They can still use the 7.5%-of-AGI threshold through 2016.
Many individuals have flexibility regarding when certain medical expenses will be incurred. They may benefit from concentrating expenses in alternating years. That way, an itemized medical expense deduction can be claimed every other year instead of lost completely if it doesn’t exceed the threshold.
Medical expenses paid for a taxpayer’s dependent, such as a parent or grandparent, can be added to the taxpayer’s own expenses for itemized medical expense deduction purposes. For a person (other than a qualified child) to be the taxpayer’s dependent, the taxpayer must pay more than half of that person’s support for the year. If that test is passed, the taxpayer can include medical expenses paid for the supported person—even if the taxpayer cannot claim a dependency exemption for that person. While the taxpayer must still clear the applicable AGI threshold to claim an itemized medical expense deduction, including a supported person’s expenses in the computation can really help.
Qualified Charitable Deductions
IRA owners and beneficiaries who have reached age 70 1/2 are permitted to make donations to IRS-approved public charities directly out of their IRAs. These so-called qualified charitable distributions, or QCDs, are federal-income-tax-free to you, but you get no charitable deduction on your tax return. But, that is fine because the tax-free treatment of QCDs is the same as an immediate 100% deduction without having to worry about restrictions that can delay itemized charitable write-offs. QCDs have other tax advantages, too.
A QCD is a payment of an otherwise taxable distribution made by your IRA trustee directly to a qualified public charity. The funds must be transferred directly from your IRA trustee to the charity. You cannot receive the funds yourself and then make the contribution to the charity. However, the IRA trustee can give you a check made out to the charity that you then deliver to the charity. You cannot arrange for more than $100,000 of QCDs in any one year. If your spouse has IRAs, he or she has a separate $100,000 limitation. Unfortunately, this taxpayer-friendly provision is set to expire at year-end unless extended by Congress.
Before Congress enacted this beneficial provision, a person wanting to donate money from an IRA to a charity would make a withdrawal from his or her IRA account, include the taxable amount in gross income, donate the cash to charity, and then claim an itemized charitable donation.
QCDs are not included in your adjusted gross income (AGI) on your federal tax return. This helps you remain unaffected by various unfavorable AGI-based phase-out rules. It also keeps your AGI low for computation of the 3.8% NIIT. In addition, you don’t have to worry about the 50%-of-AGI limitation that can delay itemized deductions for garden-variety cash donations to public charities. QCDs also count as payouts for purposes of the required minimum distribution (RMD) rules. Therefore, you can donate all or part of your 2013 RMD amount (up to the $100,000 limit on QCDs) and thereby convert otherwise taxable RMDs into tax-free QCDs. Individuals can arrange to simply donate amounts that they would normally be required to receive (and pay tax on) under the RMD rules.
Note that the charity must provide you with a record of your contribution. Also, you cannot receive any benefit from the charity in return for making the contribution. If the donor receives any benefit from the charity that reduces the deduction under the normal rules, tax-free treatment is lost for the entire distribution.