While recovering from your recent catastrophic injury, you must think about your financial future. You know you can deduct medical expenses from your taxes, but you do not know how to do so.
Kiplinger breaks down the tax planning process. Use tax laws to your advantage while focusing on adjusting to your new life.
Understanding medical expense deductions
When deducting medical expenses, thoroughly itemize them. Even then, you can only deduct medical expenses on your taxes when they surpass at least 10% of your adjusted gross income. That means that if your AGI is $100,000, you cannot deduct the initial $100,000 of medical costs. Legal and medical professionals can help you understand all your qualifying expenses.
Using your flexible spending account
Depending on your employer, you may be able to change how much of your salary you set aside for your medical reimbursement account. Because of your medical expenses, you may want to increase that salary earmark during the next open-enrollment window. The money in your flexible spending account used for incurred expenses does not incur a Social Security or income tax.
Tapping into a lawsuit settlement
Did you receive a lawsuit settlement for your injuries that included medical expenses you claimed in a prior tax season? If so, that settlement amount qualifies for taxes for the year you won it, but only for the amount that the tax deduction lowered your income for the year you claimed the expenses. Did the settlement cover future medical costs? If so, you do not owe taxes on that amount.
Take your time when handling your taxes after a major accident. You may need help from a financial expert familiar with helping injured taxpayers.