Tax deductions & credits affected in 2020 by inflation
Tax-efficient wealth building helped by 2020 inflation bumps for investment, estate and other taxes

Medical tax provisions affected in 2020 by inflation


Welcome to Part 5 of the ol' blog's 2020 series on tax inflation adjustments. 
We started on Nov. 6 with a look at next year's income tax brackets and rates.
Today we look at changes to some popular tax-related medical matters.
Note: The 2020 figures in this post apply to 2020 returns to be filed in 2021.
For comparison purposes, you'll also find 2019 amounts to be used
in filing 2019 returns due April 15, 2020.


SKB oral outpatient surgery 1107178_IMG_0136-cropped2
Yeah, you've seen this photo before. It's from about this time last year, the last time I had a medical maneuver that required I put on one of those embarrassing hospital gowns and these goofy socks. Thank goodness I had, and still have, insurance. Thank goodness, too, that there are medical tax breaks I also can claim. (Photo by Kay Bell)

The hubby and I just finished reviewing our annual health care coverage. It was not fun.

In fact, dealing with the insurance side of medicine is almost as bad as being sick.

Almost.

There is, however, one positive when it comes to medical matters. In many instances, tax breaks can help offset some the every-increasing wellness costs.

And many of the many medically-related tax laws also are adjusted each year for inflation.

Below is a look at how these cost-of-living changes in tax year 2020 will affect some of the more popular tax breaks.

Flexible spending account (FSA): A medical flexible spending account, or FSA, is a great and tax-saving way to pay for health costs that aren't covered by your insurance. How much you put into this workplace benefit also is indexed for inflation.

The base FSA amount for a health-related account was set at $2,500 when the Affordable Care Act, aka Obamacare, became law. That law also allows for the possibility that the FSA limit could increase depending on inflation.

For the 2020 tax year, you can put up to $2,750 in your FSA. That's $50 more than the $2,700 limit in 2019.

Health Savings Account (HSA): Sometimes the cost of health insurance makes you feel worse than things that drive you to the doctor. That's why some folks opt for a high-deductible health plan, or HDHP.

The premiums for an HDHP tend to be lower. The downside, though, is that you have to pay more to reach that high deductible amount before the insurance coverage kicks in.

The tax code offers some help in dealing with an HDHP's high out-of-pocket costs. You can open an associated Health Savings Account, or HSA, to pay for your larger deductibles.

The tax benefits of an HSA include:

  • Fully deductible contributions up to the legal limit,
  • Untaxed withdrawals when used to pay qualified medical expenses, including dental and vision treatments,
  • Tax-free interest on the earnings as long as the money is used to pay qualified medical expenses, and
  • No requirement that HSA money be used or forfeited by a certain deadline.

The IRS actually announced earlier this year the 2020 inflation adjustments for HSAs and the HDHPs required to open these medical accounts.

The table below shows the HSA contribution and maximum out-of-pocket limits for high-deductible medical coverage for the 2020 and 2019 tax years. Note that the catch-up provision is set by law and not subject to annual inflation adjustments.

 Maximum Contribution and Out-of-Pocket Limits
 Health Savings Accounts (HSAs)
& High-Deductible Health Plans (HDHPs)

 

 2019

 2020

 HSA contribution limit

 Self-only: $3,500
 Family: $7,000

 Self-only: $3,550
 Family: $7,100

 HSA catch-up contributions
 
(age 55 or older)


 $1,000


 $1,000

 HDHP minimum deductibles

 Self-only: $1,350
 Family: $2,700

 Self-only: $1,400
 Family: $2,800

 HDHP maximum
 out-of-pocket amounts

 Self-only: $6,750
 Family: $13,500

 Self-only: $6,900
 Family: $13,800


And here's another bit of good news for HDHP/HSA owners. Earlier this year, the Treasury Department took steps to make things easier for some dealing with chronic illnesses.

Under the new guidance (Internal Revenue Service Notice 2019-45), they have more flexibility in paying for such treatments as glucose or blood-pressure monitors and regular medications for such ailments as asthma, congestive heart failure and diabetes.

Medical Savings Account (MSA): Another tax-favored medical savings account is the aptly named Medical Savings Account, or MSA. This account also is known as an Archer MSA, named after former Texas Republican Rep. Bill Archer. Whatever you call it, these accounts also were affected somewhat by the new tax law inflation changes.

Archer MSAs were created to help self-employed individuals and employees of certain small companies meet medical care costs. But since 2007, they have essentially been replaced by HSAs. (Details on the different accounts can be found in IRS Publication 969.)

For tax year 2020, the IRS says that participants who have self-only coverage in an MSA, the plan must have an annual deductible that is not less than $2,350 (that's the same as for the 2019 tax year), but not more than $3,550 (an increase of $50 from this tax year). The maximum out-of-pocket expenses (other than for policy premiums) for self-only coverage in 2020 will be $4,750, up $100 from the $4,650 cap in 2019.

For tax year 2020, participants with family coverage, the floor for the annual deductible is $4,750, up $100 from the $4,650 in 2019. However, the deductible cannot be more than $7,100, which is a modest $100 hike from the $7,000 for this year.

And if you have family coverage, the out-of-pocket expense limit (again, this doesn't cover premiums) is $8,650, an increase of $100 from tax year 2019 limit of $8,550.

Long-term care coverage premiums: In addition to medical insurance, many folks buy long-term care insurance to help them pay for the assistance they might need, in their own homes or in an eldercare facility, when they are older.

Premiums for a long-term care policy are deductible up to a certain amount as an itemized medical expense. The maximum deduction is based on your age and the amounts that can be claimed on Schedule A — and which in 2019 and beyond must be more than 10 percent of your adjusted gross income unless Congress acts on this tax extenders threshold — are adjusted for inflation.

The table below shows the deducible long-term policy payment amounts for the 2019 and 2020 tax years:

 Age by the end
 of the tax year

 2019

 2020

 40 or younger

 $420

 $430

 41 to 50

 $790

 $810

 51 to 60

 $1,580

 $1,630

 61 to 70

 $4,220

 $4,350

 71 and older

 $5,270

 $5,430


Daily dose of tax inflation tips:
Well, that' wasn't too bad. In fact, it took less time to read this post than the wait time you usually have to endure when you go to the doctor.

I hope the information 's visit makes you feel a bit better about your taxes and how you can use these medical tax breaks to reduce them.

And the good tax medicine isn't over. Come back tomorrow for a look at tax numbers on ways to grow family wealth in the next in the ol' blog's 10-part tax inflation 2020 series.

You can also get a full review of already posted parts of the inflation series and a preview of everything that's to come in the index at the end of Part 1.

Finally, since this post is on Sunday, all the inflation adjustment posts, both those published and those to come in the next five days, earn this week's By the Numbers recognition.

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