Question

Mr. and Mrs. Compton paid $9,280 of medical expenses that were not reimbursed by their private insurance provider.

1. Compute the after-tax cost of these expenses assuming that the Comptons itemize deductions on their joint tax return, their AGI is $87,000, and their marginal tax rate is 24 percent.
2. Compute the after-tax cost of these expenses assuming that the Comptons itemize deductions on their joint tax return, their AGI is $424,000, and their marginal tax rate is 35 percent.
3. Compute the after-tax cost of these expenses assuming that the Comptons take the standard deduction on their joint tax return, their AGI is $39,000, and their marginal tax rate is 12 percent.

Answer 1

IN ORDER TO CALCULATE THE AFTER - TAX COST OF THE MEDICAL EXPENSES, FIRST SHOULD KNOW THAT THERE IS A FLOOR LEVEL FOR MEDICAL EXPENSES DEDUCTIONS. THAT FLOOR OR LEVEL MEANS CAN DEDUCT QUALIFIED MEDICAL EXPENSES THAT EXCEED A CERTAIN PERCENTAGE OF ADJUSTED GROSS INCOME (AGI) AS PER FEDERAL LAWS.

IN THE YEAR 2019, THE LEVEL OR FLOOR IS 10% FOR ALL TAXPAYERS REGARDLESS OF AGE. ASSUMING THE GIVEN QUESTION IS FOR THE YEAR 2019, IS ANSWERED AS FOLLOWS:-

QUALIFIED MEDICAL EXPENSES - $9280

1. AGI $87000, MARGINAL TAX RATE 24%

MEDICAL EXPENSES FLOOR = $87000 x 10% = $8700

TAX DEDUCTIBLE COST OF MEDICAL EXPENSES = $9280-$8700=$580

AFTER TAX COST OF MEDICAL EXPENSES = $8700

2. AGI $424000, MARGINAL TAX RATE 35%

MEDICAL EXPENSES FLOOR = $424000 x 10% = $42400

TAX DEDUCTIBLE COST OF MEDICAL EXPENSES = $9280-$42400=NEGATIVE. THAT MEANS FULL AMOUNT IS DEDUCTIBLE AS MEDICAL EXPENSES

AFTER TAX COST OF MEDICAL EXPENSES = 0

3. AGI $39000, MARGINAL TAX RATE 12%

MEDICAL EXPENSES FLOOR = $39000 x 10% = $3900

TAX DEDUCTIBLE COST OF MEDICAL EXPENSES = $9280-$3900=$5380

AFTER TAX COST OF MEDICAL EXPENSES = $3900