For now, separating couples who wish to benefit from the current law will need to move quickly and finalize their divorce or separation instruments prior to 2019. Even if the divorce or separation instrument is subsequently modified, as long as it is executed before 2019, it will be grandfathered unless the modification specifically states that alimony payments will be included in the taxable income of the payer.
Phase II, Part 2: Increase in the Medical Expense Deduction Floor
What is it?
Since 2017, qualified medical expenses that have exceeded 7.5% of AGI generally have been deductible. Beginning in 2019, qualified medical expenses will have to exceed 10% of AGI to be deductible.
For example, consider Joe, who has an AGI of $200,000 and itemized deductions in excess of the standard deduction. Suppose that Joe normally spends $25,000 in annual qualified medical expenses. In 2018, $10,000 ($25,000 - $15,000 (7.5% x $200,000)) will be deductible from his taxable income; but in 2019, only $5,000 ($25,000 - $20,000 (10% x $200,000)) will be deductible.
What are the key planning implications?
Since the TCJA roughly doubled the standard deduction, many households that itemized deductions before the TCJA no longer will do so. The medical expense deduction is a “below-the-line” deduction and is therefore available only to those who itemize.
If possible, short-term “bunching” may be advisable. Again, let’s consider Joe, with his AGI of $200,000. As mentioned above, he normally pays $25,000 in annual qualified medical expenses. If he continues to do so, $10,000 will be deductible from his taxable income in 2018, and $5,000 will be deductible in 2019, for a total of $15,000 in deductions in 2018 and 2019. If, however, he were able to pay $35,000 in 2018 and only $15,000 in 2019, then a total of $20,000 ($35,000 - $15,000 (7.5% x $200,000)) would be deductible in 2018, with no deduction available in 2019 (because $15,000 is less than $20,000 (10% x $200,000)). In total, he would deduct $5,000 more over the same time period.
Even after 2018, “bunching” of expenses into a single year may be advisable in order to overcome the 10% threshold. Suppose that Joe can “bunch” his 2019-2020 medical expenses so that he pays $35,000 in 2019 and $15,000 in 2020. In this case, his total deduction will be $15,000 (($35,000 - $20,000) + (no deduction for 2020)). If he pays $25,000 in 2019 and $25,000 in 2020, his total deduction will only be $10,000 (($25,000 - $20,000) + ($25,000 - $20,000)).
Importantly, the new law should also increase the need to consider tax-savvy ways to pay for medical expenses. Health savings accounts, health reimbursement accounts, medical savings accounts, and flexible spending accounts are set to become even more important starting next year.