Some of the most common tax questions I’ve been asked revolve around claiming medical expenses. What seems like a simple concept can lead to some complex questions. Here’s the top 3 things you should know about claiming medical expenses:
1) The Three Percent Rule
Many taxpayers expect to receive a deduction for every cent they’ve paid in medical expenses. The amount you can claim is actually based upon your income. Because the medical expenses credit is designed to assist Canadians who have significant expenses over the course of a year, only a portion of your medical expenses translates to a deduction. From your total medical expenses, the lesser of either $2,208 or 3% of your income will be deducted. For example, if your net income is $60,000, the first $1800 of medical expenses won’t count toward a credit. If your medical expenses total, $2000, only $200 will be applied to your bottom line.
2) The Twelve Month Rule
Unlike most other expenses, medical expenses don’t have to follow a calendar year. You are allowed to pick your 12 month period. As long as the end of the 12 months falls within the tax year you are reporting, you are free to choose the best time frame for your situation. Let’s say you had a ton of medical expenses from November 2015 until March 2016. Both kids got braces, your spouse spent a bundle on glasses, and you had to have some physiotherapy due to a fall. If you choose to follow the calendar year, you might be shorting yourself some cash. The 3% rule will be applied to the expenses in 2015 and then again in 2016. If you make your twelve month period from November 1, 2015 until October 31, 2016, you’ll be able to lump all of these expenses together on your 2016 return. This maximizes the impact as the total will only be subjected to the three percent rule once. If you choose to alter your twelve month period, make sure you keep track of the dates for future years.
3) Which Spouse Should Claim the Expenses?
Because one spouse can claim the total medical expenses for the family, this is a popular question. My standard answer is “it depends”. It depends on the income levels and credits available to each spouse. Usually, the lower earner will see a bigger benefit. Because of the 3% rule, the lower earning spouse has a lower threshold to reach before the medical expenses translate to a credit. If one spouse earns $70,000 in net income, only the expenses over $2100 will be applied as a deduction. If the other spouse has $30,000 of net income, amounts over $900 count toward the credit.
There is an exception to this general rule. If one spouse has enough credits to bring their tax owing to zero, the medical expenses may be wasted if this spouse claims them. For example, if you have lots of unused tuition credits from previous years, your credits may be enough to wipe out your tax owing. Because medical expenses are generally non-refundable, except in certain cases, claiming the expenses on your return wouldn’t result in any benefit to you. TurboTax features an excellent tool for figuring this out. By using the details of each spouse’s return, the medical expenses optimizer runs the numbers for you and indicates who should claim the expenses for the most overall benefit.