The medical expenses offset is set to be income tested for the 2013 tax year if legislation initially announced in the May 2012 budget goes through parliament.
The current rules
The 2012 rules allow a 20% tax offset for net medical expenses above $2,060 (previously the threshold was $2,000 for a number of years). In the 2013 year, the threshold will increase to $2,120.
Net medical expenses
Net medical expenses means after all reimbursements like Medicare and private health reimbursements, i.e. actual amount out of pocket for the year. Note that net medical expenses are on a cash basis, so a Medicare refund received post year end would potentially be included in next years’ calculations.
Medical expenses include things that are prescribed or referred by a doctor, so over the counter medicine like cold and flu tablets are not included. Also -for those trying to be forever young, cosmetic surgery and yoga sessions aren’t included and as medical expenses. For the elderly and their carers – nursing home fees may be claimable.
Due to the threshold, commonly the net medical expenses for a family might be claimed in one individuals’ return to receive a larger claim.
The proposed income test – singles above $84,000 adjusted taxable income from 1 July 2012
From 1 July 2012 (2013 year), the new rules would increase the medical expenses threshold to $5,000 and limit the offset to 10% if adjusted taxable income is above $84,000 for singles or $168,000 for families (those with either spouse or dependent children). Where the taxpayer has more than 1 dependent child the threshold increases by $1,500 per child.
Adjusted taxable income
The proposed income test is based on adjusted taxable income, so items like salary sacrificed super or fringe benefits from work and negatively geared rental property are added to taxable income. Basically this means you can’t use the usual tricks of reducing taxable income to also reduce your income for medical expense offset purposes.
An example –medical expenses with income below threshold
So a family with 2 children would be allowed the family total adjusted taxable income of $168,000 + $1,500 = $169,500.
Assuming they had $4,000 medical expenses, you would reduce the amount by $2,120 and claim the 20% offset ($376) at item T9 in their tax return. The $376 offset is a non-refundable tax offset.
How much you will be worse off
Assuming the law is enacted, if your income is over the threshold you will be worse off as follows:
Below the $2,120 threshold – no difference (no claim under either scenario)
Over the $2,120 threshold – 20% above $2,120 (up to $576 at $5,000)
Over $5,000 net medical expenses – $576 + 10% above $5,000.