Dealing with a health crisis can be very challenging as it takes a toll on not just your physical but your mental health, and it can be costly. Regarding taxes, medical expenses are deductible, but only a few taxpayers enjoy such tax deductions, so what's the catch, and how do you get such tax deductions? There are two things to consider:
Your deductions must be itemized for medical expenses to be written off, but sadly only-third of taxpayers do this.
Your medical costs are deductible when they exceed 7.5% of your adjusted gross income (AGI). For example, if your AGI is at $40,000, the first $3,000 of unreimbursed medical expenses wouldn't matter.
Sometimes, taxpayers give up on getting the tax deductions because the process seems complex, but in some cases, it works if certain factors are met, such as:
If you have a low AGI, which could be caused by low taxable retirement income or if you've been out of work for a long time.
If your medical bills are high because of an acute illness or injury.
With a combination of these two factors, you can enjoy the benefits of deductible taxes. You can also make some tax-free withdrawals for medical purchases through several plans that include:
Flexible spending accounts (FSA)
Archer medical savings accounts (MSA)
Health Savings Accounts (HAS)
HAS and MSA
With the HAS and MSA, you will need a high deductible health plan to pay medical bills. Anyone can set up this plan with others contributing to it on behalf of the account's beneficiary. The monies in these accounts can increase tax-free, and withdrawals for medical expenses are exempted from income taxes.
FSA
The FSA, on the other hand, is established by employers and doesn't have to be connected to a highly deductible health plan. Here, both employees and employers can contribute to the account, but it must be funded through payroll deductions. The salaries placed in the FSA are used to pay medical bills and won't be included in income or social security taxes. There are no limits to the amount per contribution. Some companies limit their contributions to $5,000 or less yearly. Here is an illustration:
If you place $5,000 in your FSA, it wouldn't be taxed as an income, it will exempt the social security and Medicare tax pegged at 7.65%, and if your tax rate is placed at 25%, you can save mo0re than $1,000. You can also change the amount you contribute to your FSA account yearly, which helps you plan your medical bills as it increases or decreases.
Regarding disability insurance payments, if you have a particular health condition with you getting the benefits of a disability insurance policy, the income will be taxed or not taxed based on how the insurance premium was paid. The IRS will consider if it was paid with monies that were pre-tax or post-tax.
However, if you receive a settlement with money for medical expenses deducted in the previous year, the amount deducted will be taxable in the year you get it. Additionally, suppose the payment includes funds for future medical expenses. In that case, that amount will not be taxable, but you cannot deduct your future medical bills: you can only deduct the amount that exceeds the award.
Lastly, the compensation you get from personal injury claims is generally not taxable under federal and state laws. Regardless of how the case is settled, neither the federal nor state can tax you for an injury settlement. The typical personal injuries aim to compensate the claimant for medical bills, emotional distress, suffering, and attorney fees. But please note that the settlement or verdict that is non-taxable can only arise from physical injuries and not emotional ones.
FOR MORE INFORMATION ON HOW TUCKER ACCOUNTING SERVICES, LLC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.
THANKS FOR VISITING.
Tucker Accounting Services LLC