Tax deduction, credit and income exclusion inflation bumps for 2021
Death, taxes and more and the effects of inflation in 2021

Medical tax matters affected by inflation in 2021


Welcome to Part 5 of the ol' blog's series on 2021 tax inflation adjustments. 
We started with a look at next year's income tax brackets and rates.
That first item also has a directory, at the end of the post,
of all of next year's tax-related inflation updates.
In today's post, we look at changes to some popular tax-related medical matters.
Note: The 2021 figures in this post apply to that tax year's returns to be filed in 2022.
For comparison purposes, you'll also find 2020 amounts that apply to this year's taxes, due April 15, 2021.


Healthcare-workers-face-masks-3985163_Gustavo-Fring_Pexels
Medical issues have taken on new urgency in 2020 due to the coronavirus pandemic. Some tax breaks that are adjusted each year for inflation could help cover the costs. (Photo by Gustavo Fring via Pexels)

Medical costs are always a concern, even when you have insurance. And with potential new treatments for COVID-19, it's important to know what your medical policy will cover.

It's also good to know how, and how much, some tax breaks can help you meet what seems to be ever-increasing health care expenses.

Many medically-related tax laws also are adjusted each year for inflation.

Below is a look at how cost-of-living changes in tax year 2021 will affect some of the more popular medical 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 2021 tax year, you can put up to $2,750 in your FSA. That's the same as the 2020 tax year limit.

If, however, your employer allows you to roll over unused FSA money into the next benefits year, then the IRS says you get a $50 inflation bump in 2021. The maximum FSA carryover amount goes to $550.

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 2021 inflation adjustments for HSAs and the HDHPs required to open these medical accounts.

To save you some time (although if you want to click on over to the earlier post, that's great, too) the table below shows the HSA contribution and maximum out-of-pocket limits for high-deductible medical coverage for the 2021 and, for comparison, the 2020 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)

 

2020

2021

HSA contribution limit

Self-only: $3,550
Family: $7,100

Self-only: $3,600
Family: $7,200

HSA catch-up contributions
(age 55 or older)

$1,000

$1,000

HDHP minimum deductibles

Self-only: $1,400
Family: $2,800

Self-only: $1,400
Family: $2,800

HDHP maximum
out-of-pocket amounts

Self-only: $6,900
Family: $13,800

Self-only: $7,000
Family: $14,000


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, with the name being in honor of former Texas Republican Rep. Bill Archer. Whatever you call it, these accounts also are potentially affected by annual 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. The IRS continues to account for them in inflation calculations to accommodate the Archer MSAs created before the law change. You can find details on the different accounts IRS Publication 969.

For tax year 2021, 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 $2,400 (that's up a tad from the $2,350 for 2020 tax year), but not more than $3,600 (another $50 increase from the current tax year). The maximum out-of-pocket expenses (other than for policy premiums) for self-only coverage in 2021 will be $4,800 (again, up $50 from this year's $4,750 cap).

For participants with family coverage in 2021, the floor for the annual deductible is $4,800 (up from 2020's $4,750). However, the deductible next year cannot be more than $7,150 (another modest $50 hike from the $7,100 for this year).

And if you have family coverage, the out-of-pocket expense limit (again, this doesn't cover premiums) is $8,750, an increase of $100 from tax year 2020 limit of $8,650.

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 2020 remains at more than 7.5 percent of your adjusted gross income (AGI) — are adjusted for inflation.

The table below shows the deductible long-term policy payment amounts for the 2020 and 2021 tax years:

Age by the end
of the tax year

2020

2021

40 or younger

$430

$450

41 to 50

$810

$850

51 to 60

$1,630

$1,690

61 to 70

$4,350

$4,520

71 and older

$5,430

$5,640


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 this information makes you feel a bit better about your taxes and how you can use these medical inflation-adjusted tax breaks to reduce them.

And the good tax medicine isn't over. We're just half way through the annual 10-part tax inflation series.

As noted in the intro box atop this post, you can get a full review of already posted parts of the series and a preview of what's to come in the index at the end of Part 1.

Stay tuned. Stay safe. Stay healthy.

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Comments

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Joey B

Thanks for sharing. this is a very valuable post.

Three Links

How exciting! Love your blog.

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