Medical Deduction Question

[jt415]

Hello,
The infertility clinic that my husband and I go to has what is called a warranty program, which provides three rounds of IVF for a set cost (at the time, $15,000). If unsuccessful after three tries, you get a majority of it back ($12,000). The year we paid the $15K, we used it along with our other medical expenses such as medication, copays and mileage for medical appts as a deduction on our income taxes using the standard formula.

We are about to get the $12,000 back, and I am wondering what we need to know about taxes in this situation. Is it considered income? Do we need to reverse the deduction we took in 2006? Is there a special form we use for this or a way to determine the formula to use to calculate the amount? Do we simply pro-rate it since it is less than the amount used to determine the amount we originally claimed?

Any advice in this matter is greatly appreciated.What is the name of your state (only U.S. law)?

 

[LdiJ]

Hello,
The infertility clinic that my husband and I go to has what is called a warranty program, which provides three rounds of IVF for a set cost (at the time, $15,000). If unsuccessful after three tries, you get a majority of it back ($12,000). The year we paid the $15K, we used it along with our other medical expenses such as medication, copays and mileage for medical appts as a deduction on our income taxes using the standard formula.

We are about to get the $12,000 back, and I am wondering what we need to know about taxes in this situation. Is it considered income? Do we need to reverse the deduction we took in 2006? Is there a special form we use for this or a way to determine the formula to use to calculate the amount? Do we simply pro-rate it since it is less than the amount used to determine the amount we originally claimed?

Any advice in this matter is greatly appreciated.What is the name of your state (only U.S. law)?

Your medical deductions, the year you deducted the 12k were limited to the amount that exceeded 7.5% of your AGI. Therefore, in my opinion, it would be "other income" to the extent that it was actually deductible.

Example: Your AGI that year was 100,000. Your medical expenses, total, were 17500.00. 7.5% of 100,000 was 7500.00. Your total medical deductions were therefore 10,000. Therefore the maximum that could be "other income" is 10,000.

 

[tranquility]

I agree. See "tax benefit rule".

 

[jt415]

follow-up questions

Thanks for the replies. Couple of other questions:

A. What if the 12K (or a portion) is used to pay for medical expenses? Can that amount be considered a wash, or is it still other income?

B. The original 15K was a loan from my 401K. What if I use the 12K (or a portion) to pay that off? Is it still other income on this year's return?

Thanks again for your assistance.

 

[LdiJ]

Thanks for the replies. Couple of other questions:

A. What if the 12K (or a portion) is used to pay for medical expenses? Can that amount be considered a wash, or is it still other income?

B. The original 15K was a loan from my 401K. What if I use the 12K (or a portion) to pay that off? Is it still other income on this year's return?

Thanks again for your assistance.

The 12k is other income on this year's form (or the applicable portion of it, again, it is only taxable to the point that it was deductible) no matter what you do with the money.

However, if you do something with the money that gives you a separate tax deduction, then you get your separate tax deduction. Repaying your 401k loan would be a very wise thing to do with the money, but it would not give you any tax deduction. Paying off other medical debt would also be a good thing to do with the money, and depending on your AGI, may give you additional deductions.

 

[tranquility]

Not only do I agree, but also it was well said.