Medical and Dental Expenses Software Example 5042 Income Tax 2025 26

United States income tax software, tax forms, tax formula example doing the data input for itemized deductions on the schedule A category of medical and dental expenses. So, get ready and some coffee so we can recognize the code cracks when doing income tax preparation. Here we are in our form 1040 example using the cert tax software. You don't need tax software to follow along, but if you have access to it, it's a great tool to tinker with. Tinkering being a great method to learn from. Standard starting point, John Smith living in Beverly Hills 90210. Filing status starting at single. No dependents, 100,000 in the W-2 income. No adjustments to income, so we have a nice easy 100,000 AGI to start off with. Page numero dos, number two. 15,750 standard deduction. This being our point of focus because we're looking at the greater of standard or itemized. Our focus this time on the itemized coming from the schedule A. So, right now we have 84,250 at the taxable income. Tax calculated at 13,455 using our worksheet over here. Progressive tax system, multiple rates, the highest one or marginal rate 22%. Let's close that out and go back to our Excel worksheet noting in a formula format. We would have the 100,000 W-2 income, no adjustments to it. Therefore, the AGI still at 100,000. Our point of focus this time being the below the line deductions, greater of itemized on schedule A or standard. Currently standard at the lowest level, mainly dependent upon the filing status, which is currently single, 15,750 pulled over here. And that gives us the 84,250 taxable income. Tax calculated by the cert at 13,455 backing into the rate which gives us an average rate not the marginal rate average rate 16% let's go back on over so our focus then is going to be on this line and it's coming from the Schedule A so if I go on over to the Schedule A this is the itemized deductions now we clearly have to clear the hurdle in order to take the itemized deductions which is like 15,000 at this point in time so that's a substantial hurdle usually will not be cleared by the medical expenses what is the thing that usually clears people through the hurdle it's going to be owning a home and usually a home in a higher cost of living area why because then you would have a substantial loan on it most likely the interest part not the payments but the interest being deductible and it would result in substantial property taxes which are state and local taxes which could be deductible for the federal side of things once you've cleared this hurdle then it you have to kind of open up the question for the medical expenses this being one of the problems with the Schedule A layout historically being that it it was kind of sold as though you need to buy a home because if you buy a home that's the American dream and then that actually gives you access to these other categories which used to be more inclusive adding things like 2% or miscellaneous deductions possibly allowing you deductions for like your your your business expenses even though you're W-2 employee which is a a little bit of a problem right the problem with the Schedule A here is that usually it's going to be more wealthy people that that qualify for the Schedule A and once they qualify for the Schedule A these other categories suddenly open themselves up where they wouldn't have opened themselves up before. That seems a little unusual and I think they fixed that to some degree, meaning if we have high taxes and interest and we clear the schedule A, clearing the standard deduction, you still open up the possibility for charitable deductions, but we don't have that as much of that weird thing where you might be able to deduct your your work expenses and stuff even if you're a W-2 employee. And the medical expenses are kind of hedged as well with this component, the 7.5% of the AGI that has to be cleared. This is quite confusing and I wanted point it out because the question with medical expenses that comes up is do I have to go through the problematic process of adding up the medical expenses because there's no 1099s typically for them. You don't have any 1098s. You just have to like go through the the payments that were made, which is quite difficult in part because you could have other things confusing things such as some of the payments being made by insurance. Is insurance deductible? You have insurance on family insurance, possibly different insurance within a household and they could have a high deductible plan and therefore have a health savings account, which could muddy up the question of the payment that was made cuz you already got a tax benefit on it as well as the premium tax credit could muddy up the question as to whether or not you have a deductible component here. So, really the question is do I have to deal with the medical expenses or not? If they if they're nowhere near uh uh the standard deduction, in this case, you know, 15,000 for the single filer, it's pretty far away from the current itemized deductions, then you probably don't have to add them up unless there was some catastrophe where they have a lot of medical expenses because they're not going to add up to the level that they would need to clear. In other words, for example, we started here at $10,000. So, at $10,000 uh the they still only get 2,500 because of this floor. How does the floor work? Well, you've got 100,000. Where does that come from? It comes from the uh adjusted gross income, meaning 1040 uh page one and then uh we have line 11A. That's after the adjustments. We talked about the adjustments before. So, any adjustments that we have would lower the adjusted gross income, which would lower the floor that we would need to clear in order to get these medical uh expenses. Let's go back on over. So, if it's at 100,000, that means that uh we we have to clear the floor of 10 of 7.5% of that, which is 7,500. 10,000 - 7,500 is only 2,500. So, that's going to that's nowhere near enough on its own for us basically to clear the hurdle. So, we would need so So, that means normally we would say, "Okay, you we probably don't need to add up the medical expenses, great, because that's a pain." Uh how high would they have to be? Now, if they did something like large uh then then you could have medical expenses. So, for example, possibly they put something in their home like an an electric thing to get up their stairs or a ramp or something, which is considered deductible for medical expenses, in which case uh that could be a expensive item, which might be able to allow you to clear the hurdle, you know, at that one time. All right? So, if I go back on over here and we say uh uh let's just let's just say that the medical expenses were like uh 30,000 or something like that. And I go back on over even at at the 30,000, if I have 100,000 of income, 22,500 would be deductible. And so now we're at 23,463 including uh the state taxes. So now we're over that 15,000. If I go over to the 1040 and then I scroll down, nothing happens to page number one, but page number two now has the standard deduction being replaced. It was at 15,750. Now it's at 23,463. Noting, however, that number is still below what it would be for married filing joint, 31,500. So so right. It's like it's just 76.5 and uh the tax at 11,750. Okay, so let's go back on over. Now, just realize as well what if I put in that $30,000 ramp or whatever as a construction and let's say that it it qualified for medical expenses. Well, what if I paid for it and I paid for like half of it in tax year 2025 and half of it in 2026. Notice that could be a problem and I I know this isn't like the right category right here, but I'm just going to say if I put 15,000 in in 2025, notice that 15,000 is going to be eaten up by the 7,500 floor. So now I only got 7,500. And then next year, if nothing changes, if the tax code is the symmetrical system, I'm also only going to get 7,500. Uh uh meaning it got eaten up like twice, right? I got I got I got the seventh instead of just eating out 7,500 of it. It ate out 14th 15,000 of it, right? So, that's something to keep in mind if there is substantial medical expenses, often times you don't have any control over it if it's a hospital thing and it's like, "Okay, it happened in December and we're going to pay the bill when the the bill becomes due. Okay." But, if if there's substantial medical expenses and you can group them in one year and instead of having them go over two years, there could be benefit to that because of this 7,000 this this it's not always seven it's, you know, a percentage of the AGI uh uh thing is going to be a problem. So, you might be able to bundle the expenses in the same year possibly using the fact that you would do have a somewhat cash-based system. So, make sure the payments are happening within the same year uh without, you know, there's there's some rules that could go outside of that, right? Uh in terms of the tax code won't let you manipulate the cash-based system too wildly, but you might have some ability to bunch the payments together. Okay. Okay. So, so now so now this now this 7,500 uh isn't going to isn't going to be enough for me to clear uh the hurdle. But, if I already cleared the hurdle because I had interest uh on the on the home, I owned a home in a high cost of living area, which means I have high mortgage interest and uh property taxes, then adding up the the the medical expenses would be more likely that it might be something worthwhile. Let's check that out, right? So, if I go back on over here and I say, "Okay, itemized deductions interest on the home, let's say the interest on the home mortgage interest was uh you know, just 15,000 in and of itself, which means I most like I almost certainly have property taxes as well. And let's say the property taxes were 6,000. Well, now I've already cleared the hurdle with that. So, now So, now the the the the interest is at the 15,000, 6,000 of the property taxes. Notice that already clears the 15,000 some seven of the hurdle. That opens up the door for other taxes, such as state income taxes. That's what this is calculating. Uh and then it opens up the door for me to possibly be able to add up the medical expenses. But, the medical expenses are still uh limited to to uh having to clear that 100 the AGI hurdle. So, now I have a high cost a high income individual or higher income individual of 100,000 same 100,000, but they own a home. The home is pushing them over. Therefore, the question is, do I have to count up the medical uh expenses at at this point in time? Well, if they don't have a lot of medical expenses, maybe not because they'd still have to have medical expenses that clear the 7,500, right? What if their income was even higher? What if What if they What if their income was like uh like 500,000. And I go back on over here. And I say, "Okay, now 7.5% of 500,000 is 37,500. So, now it's very unlikely that that that they're going to be able to add up their medical expenses and get a deduction even though they've cleared the hurdle to itemize due to the house clearing the hurdle uh because this floor is now is now acting as a as a as a thing that won't allow them to clear. So therefore, high-income individuals are likely to be itemizing. Therefore, you would think they would have the benefit of medical expenses, but they still are going to be locked out because of this floor calculation, which kind of makes sense. It's a weird kind of thing, but that kind of makes sense cuz why would the high-income individuals have access to the deduction and not low-income individuals? Low-income individuals are not going to have this floor problem, uh but they're going to have to clear the standard deduction in order to get the benefit. Let me show you what that means. So if I go back on over here and let's say the income is is like uh 30,000 or something like that. And then we go to the deductions and say what? 30,000? Let's say they don't own a home, no interest, and whatnot. uh uh and then we put 15,000 in uh the medical expenses now. So now uh if I go to the form 1040, they're at 30,000, a lot lower of the income, obviously. No adjustments, page number two, then still 15,750 on the standard deduction. So so so so in order to get the benefit, they're going to have to clear this 15,750 with just the medical expenses, but the floor of of the 30,000 isn't as much of a problem. In other words, if I go back on over here, now if I had 15,000 of the of the medical expenses, I have 30,000 AGI, that's only a 2,250, much lower hurdle for me to for me to clear. So, the 15,000 minus the 2,250 is is 12,750. So, that's still not clearing the hurdle, but it's a lot closer, right? So, if I go back on over here and I say, "Okay, my medical expenses, let's say they're 25 thousand in a particular year for whatever reason. So, so even 20,000 probably would have done it would have done it. 20,000 medical expenses. So, so now the twen- So, now the 20,000 medical expenses uh still has to clear the floor of 2,000 uh 250, but the that's a lot lower number. So, now the now the medical expenses in and of themselves are able to allow me to clear the hurdle of the standard deductions of the 15,750 or whatever, uh because the AGI limitation isn't the problem. So, that's where the that's where the play is, right? So, if it's if it's if you're low-income individual, then then you're you're going to have to have high medical expenses if that's the thing that's going to push you over because you're basically pushing over the standard deduction, which if you're single would be around that 15 to 16,000 or whatever, right? And if you're high-income individual, then you probably already are itemizing because maybe you own a home and you have property tax on it and uh the mortgage interest. Uh so, that's so so you would be able to to have the medical expenses, but you're probably going to be not having it still unless you have a lot of medical expenses because this AGI limitation's going to kind of lock you out. Uh so, that that's the that's the basic that's the basic thing. Okay. So, so the other thing to kind of keep in mind here with the medical expenses is that uh, you you you could have an a health savings account and if you have a health savings account uh, you will recall that that's something that we talked about on the on the on the on the schedule one and it's kind of like when you put the money into a health savings account, then you might get a a benefit when you put the money in, kind of like an IRA in that it wouldn't be included in income or possibly you could uh, deduct it from uh, the income. And then when you take the money out of a health savings account, the the goal is or the reason they allow you to put it in there is so that you can pay for medical expenses. But now you're paying for medical expenses with money that was tax-free. You didn't get taxed on it, right? So then so then you can't take the money out of the health savings account, which you didn't get taxed on, and then also get a deduction for that money that you spent on the medical expenses. That would be a form of double dipping. So that so that becomes kind of a problem just in terms of the logistics because now we have to say, well, where did the money come from? Did it come out of an a health savings account or did it not come out of a health savings account because if it didn't come out of a health savings account then then we'd haven't already got a tax benefit and therefore it could be included in like this 20,000. If it did come out of a health savings account, then likely you didn't get taxed on it, whether it's a health savings account through your employer or not. Now, when does that health savings account come up? Usually for lower income individuals because they have a high deductible plan paired with the health savings account. So, it's usually the lower income people that have these complexities, these weird weird situations that actually take a lot of kind of complications on these types of things, right? High [snorts] income individuals have their own weird complications, obviously. Real estate and stuff like that, usually, but But then So, the other weird thing is the advanced uh the the the credit that you could get for for the uh uh insurance, meaning uh if you're on the marketplace, as they call it, because you have a high deductible plan, then you might be able to get uh a premium tax credit, which again kind of complicates things, because now part of the part of the money that's being paid for the the premium is basically being paid by the government with the premium tax credit, which again me could lead to like a potentially double-dipping situation. And again, the only people that usually have that situation are lower income people with a high deductible plan who are on like the marketplace. So, you get this muddy situation with this crossover of, you know, is something deductible in multiple different areas kind of of of thing. Now, the other thing that comes up in the medical expenses would be what is deductible, and that uh uh is a is a question that usually is pretty straightforward, you know, like and we went over that in our in our prior presentation on on what is and is not included, but you can always come up with things that are like in the gray zone. Uh and and then you and then you have to do some research on it. Usually, it's been worked out pretty well in in uh the general case law, but if not, it you can look at the court cases and and stuff on it. So, remember, the idea here is you have to look at the Internal Revenue Code itself, and then look at the the the rulings of the Internal Revenue Code, and then if you can't find if you can't find the proper position, then you'd have to go into case law and whatnot and see what kind of stuff has been building up and if it would be applicable. Why does that happen? Cuz you can come up with all kinds of things that you would you can argue should be deductible for medical expenses. Like, I went on vacation cuz my doctor said so. That shouldn't be deductible, obviously, but you can imagine like all kinds of weird things. So, those questions will probably, you know, they could could come up. Uh so, that's uh so, that's the next thing uh to keep in mind here. Now, I'm going to go back on on this side and say if we're going to double-check this in our worksheet, we can go on over here to the schedule A uh and make a little worksheet by category. So, I'm just going to make this worksheet by category. I'm going to pull this Let's just pull this down. And then, I'll make a little medical expenses one. So, medical uh medical expenses. So, let's say this is the category of medical expenses. I'm going to make this black and white. And then, and then we can list out our expenses here, whatever, doctor, and so on and so forth. And let's say this was the how much did we put in there? Da da 20,000 20,000. And this is the total expenses. Uh so, let's sum that up equals the sum of this. And then, uh and then we're going to say floor. So, it let's say AGI the AGI is coming from the formula over here. And we have the 100,000 adjusted gross income times percent or or floor. Is that how you spell floor? It's a 0.075. Uh 7.5% percentify that. Now, it's 7.5% adding a decimal. And then we're going to say floor. This is floor rate. And so the floor is going to be equal to this times this. Okay. So that's going to give us then 20,000 minus that. So this is where the data input is going to be. And then all the stuff that's just that's not blue is not data input territory. And then and so then and so that and so that's what we have. And so then this is going to be So this will be the sum of this outer column. So there's the 12,500 which will pull into the form uh the form's over here. So so So there's the 12,500. It's lower than this. So I thought I had 20,000 cuz I had So if I make this income 30,000 then now this is 30,000. Schedule [snorts] A is now 30,000 * 7.5 is 2,250. There's the 17,750. That's pulling over to my formula over here. 30,000 uh minus it 30,000 and now I'm taking the greater of 17,750 versus 15,750. Obviously 17,750 is greater. And so we have the taxable income 12 250, which I can double-check on this side. Is that what's been calculated here? Uh no, it is not. Uh and that's because it opened up the state taxes. So if I go back on over, I also have opened the door up to the state taxes now. So let me put that in my category. So I have another category where I'm going to say is uh taxes. Taxes, let's say. And I have state tax. Now, if if I lived in California or something, I would be calculating the tax. Uh because I would be withholding. But if I don't, it would be sales tax. So it's calculated right here as sales tax. So 637. So I'll go with I'll I'll trust the system on that. We'll talk more about taxes later. And that would be uh so let's put down here total tax equals the sum of that. And then I'll make this blue and bordered. Blue and bordered. And then I'll make this just bordered. And then this needs to add up to down here. Zoom. So that's going to be 18 378. So if I go down, 18 378. Back to the form 1040, page numero dos. 18 378. So now we have 11 613. And formula 11 613. All right. So the tax is calculated at 1,163. Let's put that here. 1163 backing into the 10% average rate. Uh and the actual rate is a progressive rate, of course, which is still just 10% because now we're on one tier. We haven't cleared the the hurdle past that point. So, that's going to be the general idea. So, the the basic from the from a practical standpoint, a lot of times the medical expenses wouldn't be something that we would include in itemized deductions whether they're they are able to get itemized deductions or not, usually based on whether they own a home in a high cost of living area. Why? Because if they don't have the itemized deductions, then they'd have to clear the hurdle of 15,750. That would be the main hurdle, although they'd still have to also get over the 7.5% of their adjusted gross income, but that would be a lower hurdle if they were lower income. For high-income individuals, we're not usually looking at the standard deduction as the hurdle because they probably already itemize, but they're going to have a substantial hurdle because their AGI will be higher and therefore the 7.5% of it is the hurdle that they would have to clear. Therefore, we're looking at that kind of in-between zone of uh of them having the medical expenses and or possibly having something that happened within a particular year, which is which is going to increase the medical expenses in such a way whether they be low income or high income, pushing them into the ability to deduct it either because the low income cleared the standard deduction hurdle or the uh 7.5% of AGI hurdle.