The itemized deduction for medical and dental expenses is an item that affects a significant number of individuals who are stuck in the Alternative Minimum Tax. Depending on the type of health insurance an individual has (high deductible plan with a Health Savings Account versus a high amount of coverage with a small copay), and the type of expense incurred (elective procedures versus immediate medical needs), there may be some fairly easy opportunities for AMT savings. The key to this is in the timing of when the medical bills are paid.
For the Regular Tax, an itemized deduction is allowed for medical expenses paid during the year. A tax benefit is received, however, only to the extent the expenses exceed more than 7.5% of the taxpayer’s adjusted gross income (AGI). AGI is the number on the last line (Line 37 for 2009) of page one of the Form 1040.
For purposes of the AMT, however, there is a slight difference – the threshold a taxpayer must exceed is 10% of AGI, instead of 7.5%. This difference in the computation is the AMT item reported on the Form 6251. The tax-saving strategy for medical expenses is essentially the same for the AMT as it is for the Regular Tax, but it also requires keeping an eye on that 2.5% difference. As mentioned above, the key is when the medical expenses are incurred and, most importantly, when those expenses actually are paid.
If an individual currently is in the AMT, to the extent any elective surgery, dental, vision work, etc. could be delayed until next year (so long as these expenses are not covered by medical insurance, and are not cosmetic improvements that would not be deductible medical expenses in the first place), consideration should be given to doing so. If the taxpayer is not in the AMT next year, a tax benefit might be achieved that would not be obtained this year. Also note that, even if the individual is in the AMT again next year, to the extent a grouping of medical expenses results in exceeding the10% threshold, the taxpayer will at least get a benefit for that amount.
For example, assume AGI is $100,000 and that it will be the same next year. The taxpayer decides to get “fixed-up” a bit, and the list includes a physical exam with diagnostic tests and x-rays, seeing the dentist for braces, and Lasik eye surgery – all together, $20,000 in medical expenses. For a taxpayer in the AMT, it would be a disaster to do half of this now and half next year – the total after-tax cost would be the full $20,000. If instead all the work is done in one year, the IRS offers a nice subsidy – as much as $2,800 for an AMT payer ($20,000 less $10,000 (10% of AGI), multiplied by the 28% AMT bracket).
Even better, if in this example the taxpayer is in the AMT this year but through tax planning will not be in it again next year, the IRS’ subsidy possibly could be $5,000 ($20,000 less the 7.5% of AGI, times the 39.6% bracket – the expected highest Regular Tax bracket in 2011).