Tax and Timing for Medical Expenses

Let's consider a married couple, whom we'll refer to as John and Blanche. Both suffer from serious health problems, and they expect to incur sizable medical expenses this year and next. So says Julian Block, an attorney and former IRS special agent. ​

The couple's main question is whether there's anything they can do to take maximum advantage of their deductions for medical care. And the answer is yes! However, the specifics will depend on how much John and Blanche expect to declare as adjusted gross income on their Form 1040 and when they plan to send payments for medical care, among other details. 

Know the floor
Now, the law doesn't allow them to deduct their entire payments for medical care, just the portion of payments that exceeds 7.5% of their AGI. In other words, they cannot claim any deductions for payments in any single year that fail to top that threshold, which is why John and Blanche should either accelerate their payments or postpone them, opting to claim all the deductions in the same year.

John and Blanche should be especially mindful of those guidelines when their payments for the current year are close to, or have already surpassed, the hurdle of 7.5% and they anticipate that they'll incur charges during the following year. Since they're able to schedule many services at their convenience, the possibilities include routine dental cleanings, physical checkups and eye examinations, as well as purchasing extra pairs of eyeglasses or contact lenses. 

All said, there's a straightforward and perfectly legal way for John and Blanche to avoid the possible loss of a 2023 deduction for those payments as well as to boost their 2022 deduction. They could have the services performed and then pay for them by Dec. 31, which is a strategy that's even more advantageous when the couple anticipates an increase in AGI for 2023. Therefore, they will have a higher threshold than 7.5% as a result.

Now, suppose John and Blanche anticipate an AGI of $160,000 for 2022 and 2023, while also planning to use Form 1040's Schedule A. This can be used to itemize their customary write-offs for outlays such as medical expenditures, contributions, interest payments on their home mortgage and taxes, including state, local income and property taxes. 

The couple's medical payments will amount to $12,000 for 2022. The same is true for 2023. Next year's payments will include a check for $4,000 that they'll send in January to take care of a bill for extensive dental work that they will have received before 2022 ends. 

They consequently forfeit any write-offs for both years. The downside? Payments in both years fail to top $12,000, which is 7.5% of $160,000.

A happier scenario
The tax-savvy couple date the check no later than Dec. 31 and then drop it in a mailbox with enough time for the envelope to be postmarked by midnight on Dec. 31. That bit of forethought, which has the blessing of the IRS, will convert a nondeductible payment for 2023 into a $4,000 deduction for 2022. The IRS couldn't care less that their dentist receives the check after 2022 closes.

Protect yourself from IRS audits 
Suppose the agency's computers bounce their return. Odds are that an examiner is going to look closely at large year-end checks dated Dec. 31 and made out to, say, charities, doctors and state tax collectors.

Send such checks by certified mail and request certified mail receipts. Staple the receipts to the canceled checks. The receipts will back up your 2022 deductions for payments made with checks that may not clear the bank until well beyond the close of the year. 
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Credit cards
There's also room to maneuver when the couple uses credit cards to pay for their deductibles. Credit card payments qualify for 2022 deductions as soon as they authorize charges, even if the credit card companies don't bill them until 2023.