Today TaxMama® hears from Monica in the TaxQuips Forum, who needs to make a decision. “My tax status is single, no dependents. I plan to undergo $10,000 out-of-pocket medical procedure. Please consider these scenarios. If done in 2012 with an adjusted gross income (AGI) of approximately $50,000, $10,000 will be paid after-tax. If done in 2013 with an AGI of approximately $60,000, $2,500 will be pre-tax and $7,500 after-tax. When I take the deduction for non-reimbursed medical expenses, which year would see the greatest tax benefit?”
First, we want to thank Eliezer Appleton for the analysis he did on the itemized deductions. That saved me time.
Now, let’s look at some additional numbers.
You live in Virginia with a state tax rate of about 5% (actually, it’s 5.75%).
In 2012 that adds about $2,500 of state tax deductions to the medical expenses and raises itemized deductions to about $2,800 in excess of the standard deduction you would have anyway. That’s worth about $700 of Federal income taxes + very little in state savings (since states don’t generally give you a deduction for their own state taxes).
In 2013, the $2,500 in state taxes + $1,500 in deductible medical expenses won’t be enough to itemize. But the $2,500 payroll reduction via the Flexible Spending Account savings is worth – 7.65% SS/Medi + 25% IRS taxes + 5.75% VA taxes = 38.4% x 2,500 = $960.
So….despite not being able to itemize in 2013, by getting to avoid all levels of taxes via the FSA, Monica, you get three benefits.
1) You get to pay the money later. (And if you’re smart, you’ll use a credit card and get the rewards points – then pay it right off.)
2) You get to plan the timing of the medical procedure with less pressure.
3) You get a bit of an extra tax savings, as well.
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