With more than six months left until 2018 tax returns are due, it might seem way too early to think about anything tax-related.
Yet when it comes to your health-care costs, there are some strategic moves you might be able to make this year to maximize their tax benefit.
Experts say it's worth exploring, as the cost of health care continues its upward trajectory. Last year, per-household spending increased to an average $4,928, up 6.9 percent from $4,612 in 2016, according to recent data from the Bureau of Labor Statistics.
Additionally, Fidelity Investments estimates that the average couple turning 65 today will spend $280,000 on health care during the remainder of their lives.
The three most common planning opportunities involve flexible spending accounts, health savings accounts and the tax deduction for medical expenses. They intertwine in interesting ways, so it's important to evaluate your own situation to see if there are ways you can maximize their value for 2018, experts say.
The FSA factor
If you have a health flexible spending account, or FSA, at work, your pre-tax contributions come with a use-it-or-lose-it provision when the year ends.
While many employers provide either a grace period of up to 2½ extra months to spend it on eligible costs or allow you to carry over $500 to the next year, it's important to make sure you don't end up forfeiting that tax-advantaged money.
"If you have an FSA, the priority is to spend that money first," said certified financial planner and CPA DeDe Jones, managing director of Innovative Financial in Lakewood, Colorado.
The 2018 contribution limit for FSAs is $2,650, although many people don't max out.
Generally speaking, if you have already depleted your FSA (or don't have one), the next consideration is whether your 2018 medical expenses will get you a deduction on your tax returns.
The tax deduction
While the tax deduction for medical expenses will likely be used by fewer people this year, those who might be able to grab it should be aware that it will become even harder to do so next year. This means you might want do some things differently this year than you would otherwise.
You must itemize your deductions to take advantage of the tax break for medical expenses. And due to the near-doubling of the standard deduction for all taxpayers and the elimination of personal exemptions and most other deductions, fewer people are expected to itemize beginning with 2018 returns.
Additionally, you can only deduct medical expenses that exceed 7.5 percent of your adjusted gross income. However, that floor is set to rise to 10 percent next year.
(The House of Representatives passed a bill on Friday that would extend the 7.5 percent floor through 2020, but it faces unlikely approval in the Senate.)
This temporarily lower threshold creates some tax-planning opportunities this year, experts say.
"If someone is close to getting the deduction or knows they'll itemize, then if there are things you can accelerate into 2018 instead of waiting until 2019, it might make sense to do it," said Julie Welch, a CPA who serves on the American Institute of CPAs' personal financial planning executive committee.
For example, you could consider getting medical procedures or treatments in the next few months instead of putting them off until next year. If you do with hopes of deducting your associated costs on your 2018 return, make sure the bill is paid this year, Welch said.
Because only unreimbursed medical expenses count toward the deduction, any expenses covered by money from FSAs or health savings accounts — both of which already are tax-advantaged — is excluded. (More on health savings accounts further down.)
However, many other medical-related expenses do count, including co-pays, co-insurance, dental work, travel costs for health care and, generally speaking, insurance premiums. That includes long-term care insurance, within IRS limits.
Deduction limits for long-term care premiums
| Age before close of taxable year | 2018 maximum deduction |
|---|---|
| Under 40 | $420 |
| More than 40 but under 50 | $780 |
| More than 50 but under 60 | $1,560 |
| More than 60 but under 70 | $4,160 |
| Over 70 | $5,200 |
Source: Source: Internal Revenue Service
If you write a check in December to cover any January premiums, that money also counts toward your 2018 deduction.
You can even include the medical expenses of a non-dependent — say, an elderly parent. Even if your charge has too much income for you claim them as a dependent, you can generally count your share of their medical expenses toward your deduction, Welch said.
The HSA consideration
If you have a health savings account, or HSA, which is offered in conjunction with high-deductible health care plans, you don't have to spend your contributions the way you do with an FSA.
That means whatever you sock away in an HSA — plus any growth if your money is invested — can sit there for as long as you want it to. Its gains grow tax-free, and as long as withdrawals are used for qualifying medical expenses, tapping those funds also comes with no tax.
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Basically, this means that if you can afford to pay your medical expenses out-of-pocket now, you could consider leaving your HSA money alone. Then at any point in the future — next month, next year or even down the road in retirement — you can withdraw the money for qualifying health-care costs.
In fact, as long as you hang on to receipts for health-care costs — those you didn't use FSA or HSA funds to pay yourself back for and did not count toward the medical expense deduction — you can withdraw the money at any point in the future to reimburse yourself.
It's also worthwhile noting that HSAs are portable, while FSAs are not.
The 2018 contribution HSA limit for individuals is $3,450 and $6,900 for families. Additionally, if you're age 55 or older, you can put an extra $1,000 in.
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