Question

Paul and Libby White (both are age 66) are married and together have AGI of $105,000 in 2018. They have two dependents and file a joint return. During the year, they paid $8,000 for medical insurance, $15,000 in doctor bills and hospital expenses, and $1,000 for prescribed medicine and drugs.

(A) In December 2018, the Whites received an insurance reimbursement of $3,500 for hospitalization expenses. Determine the deduction allowable for medical expenses paid during the year.

(B) Assume instead that the Whites received the $3,500 insurance reimbursement in February 2019. Determine the deduction allowable for medical expenses incurred in 2018.

(C) Assume that the Whites received the $3,500 insurance reimbursement in February 2019. Discuss whether the reimbursement will be included in their gross income for 2019.

Answer 1

Q.A) In December 2018, the Whites received an insurance reimbursement of $3,500 for hospitalization expenses. Determine the deduction allowable for medical expenses paid during the year.

Ans. Favorable to use Standard Deduction with a tax liability of $10,183 instead of itemized deduction.

AGI		$105,000
Medical Expenses
Medical Insurance	$8,000
Doctor bills & Hospital exp.	$15,000
Prescribed Medicine & Drugs	$1,000
	$24,000
Less: Insurance Reimbursement	($3,500)
		$20,500
Computation of Tax for the year 2018
Particulars	Option I (Utilising Standard Deduction)	Option II (Utilising Itemized Deduction)
Adjusted Gross Income	$105,000	$105,000
Less: Standard Deduction
- For Married Couple filing jointly returns	($24,000)	NA
- Additional deduction for the aged	($1,300)	NA
Add: Medical expenses reimbursement from Insurance	$3,500	NA
Less: Itemized Deduction
- Medical expenses incurred (net of Insurance reimbursement) and excess of 7.5% AGI	NA	($12,625)
Taxable Income	$83,200	$92,375
Tax on above Income	$10,183	$12,202
Computation of Tax	$1,905	$1,905
Upto $19,050 @10%	$7,002	$7,002
From $19,051 to $77,400 @12%	$1,276	$3,295
From $77,401 to $165,000 @ 22%	$10,183	$12,202

Q.B) Assume instead that the Whites received the $3,500 insurance reimbursement in February 2019. Determine the deduction allowable for medical expenses incurred in 2018.

Ans. Favorable to utilize the standard deduction option for tax liability computation instead of itemized deduction.

Computation of Tax for the year 2018
Particulars	Option I (Utilising Standard Deduction)	Option II (Utilising Itemized Deduction)
Adjusted Gross Income	$105,000	$105,000
Less: Standard Deduction
- For Married Couple filing jointly returns	($24,000)	NA
- Additional deduction for the aged	($1,300)	NA
Add: Medical expenses reimbursement from Insurance	$0	NA
Less: Itemized Deduction
- Medical expenses incurred (net of Insurance reimbursement) and excess of 7.5% AGI. (i.e., $24000-($105,000x7.5%))	NA	($16,125)
Taxable Income	$79,700	$88,875
Tax on above Income	$9,413	$11,432
Computation of Tax	$1,905	$1,905
Upto $19,050 @10%	$7,002	$7,002
From $19,051 to $77,400 @12%	$506	$2,525
From $77,401 to $165,000 @ 22%	$9,413	$11,432

Q.C) Assume that the Whites received the $3,500 insurance reimbursement in February 2019. Discuss whether the reimbursement will be included in their gross income for 2019.

Ans. Yes, Reimbursement shall be included in the Gross Income for 2019.