Question

4. 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

Part- A. Computation of medical deductionallowed for medical expenses paid during 2018.
	Amount ($)
Medical insurance	8,000
Doctor bill and hospital expenses	15,000
Prescribed medicine and drugs	1,000
Total medical expenses	24,000
Less: Insurance Reimbursement	3,500
Balance	20,500
Less: 7.5% of Adjusted Gross Income ($105,000 x 7.5%)	7,875
Total medical expenses deduction	12,625
Part- B. Computation of medical deductionallowed for medical expenses paid during 2018.
	Amount ($)
Medical insurance	8,000
Doctor bill and hospital expenses	15,000
Prescribed medicine and drugs	1,000
Total medical expenses	24,000
Less: 7.5% of Adjusted Gross Income ($105,000 x 7.5%)	7,875
Total medical expenses deduction	16,125
Part- C.
If Whites reimbursed in February 2019 for medical expenses deducted in 2018, she must report as income the amount she received from insurance that is equal to or less than the amount she previously deducted as medical expenses. However do not report as income the amount of reimbursement she received upto the amount of her medical deduction that did not reduce her tax for the year 2018. therefore in this case white has to incude $3,500 reimbursement in her gross income for 2019, because if she collected this in 2018 then their medical expenses deduction in last year would have been only $12,625 (calculated in part- A) instead of $16,125 (calculated in part- B)