Qualified Medical Expense Deductions & Pretaxing
Qualified medical expense deductions can be maximized via pre tax contributions. Pre tax contributions for health insurance, qualified retirement plans, and health insurance lower reportable income which makes a greater percentage of qualified medical expenses deductible.
Pre taxing of payroll deductions may provide greater tax savings for qualified medical expense deductions in two ways:
- Lowering the AGI threshold
- First dollar tax savings
- Payroll tax savings
First Dollar Tax Savings  Many couples with growing families have plenty of medical expense deductions for infertility treatments, IVF, hospital bills, and much more. Schedule A deductions don't generate any savings until they reach 7.5% of Adjusted Gross Income. Get first dollar tax savings through your FSA.
|
Qualified Medical Expenses - Lowering the AGI Hurdle
Qualified medical expenses deductions are limited to those that exceed 7.5% of Adjusted Gross Income (AGI). Pre tax contributions lower reportable W2 income, which translates into lower adjusted gross income: the lower the AGI, the bigger the tax savings. Let's consider this simple example:
A family with an Adjusted Gross Income of $100,000 will get no tax savings from the first $7,500 of un-reimbursed medical expenses. For a family in the 25% tax bracket, that equates to $1,870 in annual tax savings.
If this same family makes $10,000 in pre tax contributions their AGI drops to $90,000 freeing up $750 in qualified medical expense deductions. These deductions would be worth $187.
This is not a huge amount of money, but when taken in combination with the five other ways that pretaxing could cut taxes, savings begin to pile up.
Qualified Medical Expense Deductions - First Dollar Savings
Most families do not have enough qualifying medical expense deductions to satisfy the 7.5% AGI hurdle. This means these deductions go to waste every year.
Consider that a Healthcare Flexible Spending Account (FSA) provides greater tax savings in two ways:
- First dollar tax savings - There is no AGI hurdle to overcome. Savings come on the first dollar contributed and spent.
- Payroll tax savings - Pre tax contributions made into an FSA help avoid payroll taxes (FICA).
