Under tax law, medical expenses can be deducted as an itemized deduction on your federal income tax return only to the extent that they exceed 7.5% of adjusted gross income (AGI). But it can be difficult to actually claim a deduction for many people because of the requirements.

To Itemize or Not to Itemize?

First and foremost, to gain any tax-saving benefit from medical expenses, you must itemize deductions on your tax return rather than claim the standard deduction. Fewer people are claiming itemized deductions these days, because the Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction amounts.

Here are the current standard deduction allowances, which are adjusted annually for inflation.

Standard Deduction Amounts for 2024

After 2025, standard deductions are scheduled to return to pre-TCJA levels unless Congress acts to extend them.

Another reason that fewer people currently itemize deductions is that the TCJA limits itemized deductions for all categories of state and local taxes to $10,000 combined (or $5,000 if you’re married and file separate returns). For people in high-tax states or with sizable income and property tax bills, this limitation can significantly lower itemized deductions for 2018 through 2025.

Your tax advisor can help determine whether it makes more sense for you to itemize or claim the standard deduction. For some taxpayers, it may be advantageous to “bunch” itemizable deductions in alternating years and then take the standard deduction in between.

AGI Threshold

Another restriction on deducting medical expenses is the AGI threshold, which is currently set at 7.5%. AGI includes all taxable income items and selected write-offs such as:

• Deductible IRA contributions,
• Teacher expenses,
• Self-employed retirement plan contributions,
• Health Savings Account contributions, and
• Alimony payments required by pre-2019 divorce agreements.

Elective medical procedures, such as eye doctor appointments and dermatology treatments, may help you get over the AGI deduction threshold for a particular tax year. Keep this in mind when planning for the tax year.

Eligible Expenses

For itemized deduction purposes, medical care is defined as “procedures and care for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” IRS regulations further stipulate that medical care includes medical, laboratory, surgical, dental, and other diagnostic and healing services. Care that’s merely beneficial to your general health isn’t medical care.

A wide range of medical costs are tax deductible. Examples of expenses that qualify as medical care include:

• Acupuncture,
• Artificial teeth,
• Vehicle accommodations (cost of special equipment so disabled person can drive),
• Chiropractic services,
• Dental care,
• Diagnostic devices,
• Eyeglasses,
• Hearing aids,
• Home improvements for medical purposes (to the extent they don’t add to the value of your home),
• Insurance premiums for health coverage, including age-based premiums for qualified long-term care insurance,
• Laboratory fees,
• Long-term care services,
• Meals (while staying in hospital or similar facility),
• Medicare insurance premiums,
• Nursing home expenses,
• Optometrist services,
• Psychiatric care,
• Stop-smoking program,
• Weight-loss program (if part of treatment for specific disease or condition, such as obesity),
• Wheelchair costs, and
• X-rays.

For a complete list, see IRS Publication 502, “Medical and Dental Expenses.”

A portion of the fees paid to enter and reside in a continuing care retirement community can qualify as medical expenses for medical expense itemized deduction purposes. These fees can be substantial — so they can easily push you over the percent-of-AGI deduction threshold.

For More Information

Did you spend enough on medical care to qualify for this tax break this year? If so, your tax advisor can help you compile a comprehensive list of eligible expenses and brainstorm strategies to maximize your itemized deduction for medical expenses.

In recent years, the residential real estate markets in many areas have surged. That means there are more seniors with highly appreciated homes than ever before. If you’re facing this situation, you might be rightfully concerned about the potential tax hit on the sale. Here’s a tax-saving strategy to consider. 

Home Sale Tax Basics

If you sell a highly appreciated principal residence, your profit could potentially exceed the federal home sale gain exclusion. That means part of the profit will be taxed as capital gain (unless you have offsetting capital losses). The maximum gain exclusion is $250,000 for single taxpayers ($500,000 for married couples who file jointly).

For example, Al and Stephanie bought their home many years ago for $300,000. After making various improvements, their tax basis in the property is $500,000. They sell it for a net sales price of $3 million. So, their tax return for the year would show a taxable gain of $2 million ($3 million minus $500,000 of tax basis minus the $500,000 gain exclusion).

How much tax would this hypothetical couple owe on their large taxable gain? The answer depends on the applicable tax rate. 

Federal Capital Gains Tax Rates

Taxable gain from a home sale will generally be taxed at the favorable long-term capital gain (LTCG) rates if you’ve owned the property for more than one year. Under the current rules, the maximum LTCG tax rate is 20%.

Here are the 2024 federal rate brackets for net LTCGs, based on taxable income, including any LTCGs:

Important: If you live in a state with no personal income tax, you’ll only have to worry about the federal tax hit. However, most states that assess personal income tax will tax capital gains, including taxable home sale gains, at the same rates as ordinary income. State and local income tax rates vary, and the tax bill can be substantial, especially if you live in a high-tax jurisdiction (such as California or New York City).

Net Investment Income Tax

Some home sellers also may be exposed to the 3.8% net investment income tax (NIIT). The NIIT hits the lesser of your:

• Net investment income, including capital gains and dividends, or
• The amount by which your modified adjusted gross income exceeds the applicable threshold.

The thresholds are as follows:

• $200,000 for single taxpayers and heads of households,
• $250,000 for married couples who file jointly, and
• $125,000 for married couples who file separately.

So, some home sellers could owe up to 23.8% to Uncle Sam on long-term gains from home sales (20% LTCG tax plus 3.8% NIIT).

Tax Rate on Gains Attributable to Depreciation Deductions

If part of your gain is taxable due to business or rental use of the home, you also must file Form 4797, “Sales of Business Property.” That form calculates how much of your gain may be subject to the special 25% federal income tax rate on gain attributable to depreciation deductions. These are technically called “unrecaptured Section 1250 gains.” 

Possible Solution: Aging in Place

Instead of selling your highly appreciated home, you could choose to hang on to the home to avoid a painful tax hit. If you’re able to keep the home until you die, for federal income tax purposes, the tax basis of the portion of a personal residence that you own is stepped up to fair market value (FMV) on either:

• The date of your death, or
• Six months after that date, if the executor of your estate chooses the alternate date.

If you’re the sole owner of your home, the basis step-up rule applies to the entire residence after you die. When your heirs sell the property, federal capital gains tax will only be due on the additional appreciation (if any) that occurs after that date. 

If you own the home with your spouse, the tax basis of the portion you own will be stepped up when you die. The tax basis of the remaining portion will be stepped up when your spouse dies. Once again, your heirs will probably owe little or no federal capital gains tax when the property is sold.

If you and your spouse own the home as community property in one of the nine community property states, the tax basis of the entire residence is generally stepped up to FMV when the first spouse dies, not just the half that was owned by that person. This means the surviving spouse can then sell the place and owe little or nothing in federal capital gains tax.

Important: If these taxpayer-friendly basis step-up rules also apply in your state, the aging-in-place strategy will work for state income tax purposes, too.

Vacation Homes

If you sell a highly appreciated home that’s not your principal residence — such as a vacation home — you get no gain exclusion break. So, the entire profit will be taxed as capital gain (unless you have some offsetting capital losses).

Going back to the previous example, let’s assume the same facts, except that Al and Stephanie sell a vacation condo in Florida, rather than their personal residence. In this situation, the couple would have a taxable gain of $2.5 million ($3 million minus $500,000 of tax basis in the property). There’s no gain exclusion break for vacation homes. 

However, if you hold on to a highly appreciated vacation home until you die, your heirs will receive a step-up in basis on the home. The stepped-up basis will equal the property’s market value on the date of your death (or its market value six months after the date of your death if your executor elects to use an “alternate valuation” date). Then, if your heirs decide to sell the property, they’ll only pay capital gains tax on the difference between the net sales price and the stepped-up basis. This strategy could save major tax dollars compared to selling the property during your lifetime.      

When It Might Pay to Do Nothing

Tax planning usually calls for you to take action. But this is one situation where it might make sense to hang tight. If you’re worried that you can’t afford to keep your home, you can probably take out a reverse mortgage to get the cash you need. The interest and transaction costs of a reverse mortgage could be a small fraction of the tax cost you’d avoid by hanging on to your highly appreciated home. Contact your tax advisor to determine if this strategy is right for you and your family.

On Thursday, the BHCB team came together for our annual Summer outing. This year the outing was held at the Silver Sands Beach & Tennis Club in East Haven. It was a beautiful sunny day filled with delicious food and great conversation.

Quick, how many subscription services are you currently paying for? Whatever the number, it’s likely you missed one or two. Subscription services have been around for a long time – think newspaper and magazine subscriptions. Today, however, they’ve ballooned to include digital subscription services such as video and music streaming, internet and cell phone. Food delivery and retail subscriptions are also available.

Most providers offer free trials and automatic recurring credit card payments, so you may have trouble keeping track of all your subscriptions. Those recurring costs can quickly add up and take a big bite out of your household budget.

In the current inflationary environment, the cost of almost everything is increasing. So you may want to look for monthly expenses to slash. You can wrangle subscription costs in three simple steps:

1. Review recent credit card and bank statements,
2. Identify recurring subscription charges, and
3. Cancel the subscriptions you’re not using or are using infrequently enough that it wouldn’t be a hardship to cancel them.

If poring over your banking records is too time consuming, there are several budgeting apps that can do the work for you. These apps monitor your financial transactions and identify recurring transactions, allowing you to cancel unwanted subscriptions.

Some will even cancel subscriptions for you. Keep in mind, however, that this service typically comes with its own monthly fee.

Let’s say a person is planning to take a plane trip out of the country. And further suppose that individual owes the federal government a fair amount of back taxes. The person may not be able get a passport if he or she owes the government a significant amount of back taxes. The IRS is now reminding taxpayers that legislation passed back in 2015 allows the tax agency to revoke passports or deny new ones to major debtors.

Background of the Law

Under the Fixing America’s Surface Transportation Act of 2015, a highway spending measure, the IRS was granted the authority to notify the U.S. State Department about taxpayers who have “seriously delinquent tax debts.” The State Department is then tasked with denying the individual their passport application or renewal. It took a while to put the wheels in motion, but the IRS has been enforcing this provision of the law for several years.

For these purposes, a seriously delinquent tax debt is defined as $50,000 or more, indexed for inflation. The threshold for 2024 is $62,000 (up from $59,000 in 2023). This includes back taxes, penalties and interest for which the IRS has filed a tax lien or issued a levy.

How It Works

If a taxpayer is certified as owing a seriously delinquent tax debt, he or she receives a Notice CP508C from the IRS. This notice explains the steps that must be taken to resolve the debt. For instance, IRS representatives may help a taxpayer set up a payment plan or explain other payment alternatives. People who owe back taxes shouldn’t delay — especially if they’re planning a trip abroad.

Once the tax obligations are met, the IRS will reverse the taxpayer’s certification within 30 days. Matters may be expedited under certain circumstances.

Before denying a passport renewal or new passport application, the State Department will hold a taxpayer’s application for 90 days to allow him or her to resolve any erroneous certification issues, make full payment of the tax debt or enter into a satisfactory payment arrangement with the IRS.

In an IRS announcement, the agency presents several ways that an individual can avoid having the State Department notified of a seriously delinquent tax debt, including the following:

• Pay the tax debt in full;
• Pay the tax debt in a timely manner under an approved installment agreement;
• Pay the tax debt in a timely manner under an accepted offer in compromise (OIC);
• Pay the tax debt in a timely manner under the terms of a settlement agreement with the Department of Justice (DOJ);
• Have requested or have a pending collection due process appeal with a levy; or
• Have collection suspended because you’ve made an innocent spouse election or requested innocent spouse relief.

The IRS also has provided details on two key relief programs available to taxpayers who could have their passports revoked or denied.

1. Payment agreements. A taxpayer can formally request to use a payment plan by filing Form 9465. This form can be sent with a tax return bill or notice or a taxpayer can arrange a monthly payment agreement online.

2. Offers in compromise (OIC). With an OIC, a taxpayer settles up with the IRS for an amount that’s less than the actual tax liability. The IRS will examine the individual’s income and assets to determine his or her ability to pay. An individual can use an online pre-qualifier to see if he or she is likely to qualify for an OIC.

Other special rules apply to taxpayers who are currently serving in a combat zone.

Moral of the story: As you can see, there are several available options for avoiding a worst-case scenario. With assistance from a tax advisor, a person who owes back taxes should be able to find a soft tax landing.