12.3 Schedule A: Medical and Dental Expenses (7.5% Floor) & State and Local Taxes (SALT $40K Cap)

Schedule A and the Itemization Threshold

When a taxpayer's allowable personal deductions exceed their statutory standard deduction, the taxpayer files Schedule A (Form 1040) to itemize deductions. Below-the-line itemized deductions (Form 1040, Line 12e) reduce Adjusted Gross Income (Line 11a) to arrive at Taxable Income (Line 15). Schedule A encompasses five core categories:

1. Medical and Dental Expenses (IRC §213)
2. Taxes You Paid (SALT) (IRC §164)
3. Interest You Paid (IRC §163)
4. Gifts to Charity (IRC §170)
5. Casualty and Theft Losses (IRC §165)

This section focuses on the first two categories: the high-threshold medical expense deduction and the restructured State and Local Tax (SALT) deduction.

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Medical and Dental Expenses (IRC §213)

Under IRC §213(a), individual taxpayers are permitted an itemized deduction for expenses paid during the taxable year for the medical care of the taxpayer, their spouse, or a dependent, to the extent that such expenses exceed 7.5% of Adjusted Gross Income (AGI).

The Cash-Basis Timing Rule

Medical expenses are deductible only in the year actually paid, regardless of when the medical illness occurred or when the services were rendered:

• Credit Card Rule: Payment by credit card is deductible in the year the expense is charged to the card, not when the taxpayer pays the monthly credit card statement.
• Check Rule: Payment by check is deductible on the date the check is placed in the mail or delivered to the provider.
• Reimbursements: Expenses must be reduced by all insurance reimbursements and HSA/FSA distributions received during the tax year. If an insurance reimbursement is received in a subsequent year for an expense deducted in a prior year, the reimbursement is included in gross income under the tax benefit rule (IRC §111).

Eligible Family Members & The Medical Dependent Rule

A taxpayer can deduct medical expenses paid for:

1. The taxpayer and the taxpayer's spouse (at the time the services were provided or paid);
2. Any individual who was a qualifying child or qualifying relative at the time the services were provided or paid.

The Special Medical Dependent Rule: A taxpayer can deduct medical expenses paid for an individual who meets all requirements for a qualifying relative except that:

• The individual had gross income of $5,050 or more (the 2025 gross income threshold); OR
• The individual filed a joint return with their spouse; OR
• The taxpayer could be claimed as a dependent on someone else's return.

Divorced Parents Rule: If parents are divorced or separated, a child is treated as a dependent of both parents for medical expense purposes. Either parent can deduct the medical expenses they actually paid for the child, even if the other parent claims the dependency exemption and child tax credit under Form 8332.

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Qualifying vs. Non-Qualifying Medical Expenditures

Capital Expenditures for Medical Improvements

A capital improvement made to a taxpayer's personal residence for medical purposes (such as installing an elevator, wheelchair ramp, widening doorways, or installing therapeutic pools) is deductible under Treas. Reg. §1.213-1(e)(1)(iii) subject to a strict formula:

$\text{Deductible Capital Expense} = \text{Cost of Improvement} - \text{Increase in Property's Fair Market Value}$

Exception for Removal of Structural Barriers: Expenditures to accommodate a home for a disabled individual—such as wheelchair ramps, lowering cabinets, widening hallways, and modifying hardware—are deemed by the IRS to add $0 to the home's value (Rev. Rul. 87-106). Therefore, 100% of these structural barrier costs are deductible immediately. Ongoing Maintenance: The full cost of operating and maintaining medically necessary capital equipment (electricity, repairs, maintenance contracts) is fully deductible in subsequent years, regardless of whether the initial installation was capitalized.

Qualified Long-Term Care Insurance Premiums (IRC §213(d)(10))

Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses on Schedule A, but are capped by statutory age-based limits adjusted annually for inflation. For tax year 2025:

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Comprehensive Medical Expense Calculation Walkthrough

Scenario: For tax year 2025, Danielle has an Adjusted Gross Income (AGI) of $80,000. Danielle incurs and pays the following unreimbursed expenses during 2025:

• Prescription medications: $2,200
• Doctor visits and clinical lab fees: $3,800
• Over-the-counter vitamins and analgesics: $600 (Disallowed)
• Elective cosmetic dental bleaching: $4,000 (Disallowed)
• Travel for specialized surgery: 1,000 miles driven (1,000 mi \times 21¢ = $210)
• Post-tax individual health insurance premiums: $4,500

Step 1: Calculate Total Qualifying Medical Expenses: $\$2,200 + \$3,800 + \$210 + \$4,500 = \mathbf{\$10,710}$

Step 2: Calculate the 7.5% AGI Nondeductible Floor: $\$80,000 \times 7.5\% = \mathbf{\$6,000}$

Step 3: Calculate Allowable Schedule A Deduction: $\$10,710 - \$6,000 = \mathbf{\$4,710}$ Danielle enters $4,710 on Schedule A, Line 4.

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State and Local Taxes (SALT) (IRC §164)

Under IRC §164, individual taxpayers can claim an itemized deduction for specific state and local taxes paid during the taxable year. Historically capped at $10,000 under the TCJA, this deduction was substantially overhauled by the One Big Beautiful Bill Act (OBBBA).

The Expanded OBBBA SALT Limitation ($40,000 Cap for 2025)

Beginning in tax year 2025, the OBBBA increased the statutory ceiling on the aggregate deduction for state and local taxes:

• Single, Head of Household, MFJ, and QSS: Up to $40,000 per tax year.
• Married Filing Separately (MFS): Up to $20,000 per tax year.
• High-Income Phase-Down: The cap is reduced by 30% of modified AGI above $500,000 ($250,000 MFS), but never below $10,000 ($5,000 MFS). The cap therefore returns to the $10,000 floor at MAGI of $600,000 or more.
• Scheduled Changes: The $40,000 cap and $500,000 threshold rise 1% per year for 2026 through 2029, and the cap reverts to $10,000 in 2030.

Phase-Down Example: A joint return with MAGI of $540,000 and $48,000 of state income and property taxes has a cap of $40,000 - (30% × $40,000) = $28,000, so only $28,000 of SALT is deductible.

The Four Eligible SALT Categories

Taxpayers may aggregate qualifying taxes from the following categories up to the $40,000 cap:

1. State and Local Real Property Taxes: Taxes levied on personal real estate (primary home, vacation cabin, land). Must be based on the assessed valuation of the property and levied for the general public welfare.
   • Disallowed Local Benefits: Special assessments for local benefits that increase the value of the property (sidewalks, sewer lines, water mains) are nondeductible capital expenditures that must be added to the property's tax basis.
   • Foreign Real Estate Ban: Under TCJA and OBBBA, foreign real property taxes cannot be deducted on Schedule A.
2. State and Local Personal Property Taxes: Annual taxes imposed on personal property (such as automobiles, boats, or RVs). To be deductible, the tax must satisfy three statutory tests:
   • Ad Valorem: Must be based strictly on the value of the personal property.
   • Annual: Must be assessed on an annual basis.
   • Personal Property: Imposed on personal property.
   • Registration Fee Trap: An auto registration fee based on vehicle weight or a flat fee is nondeductible. Only the specific line item calculated on vehicle value qualifies.
3. State and Local Income Taxes OR General Sales Taxes (The Mandatory Election): Taxpayers must make an annual choice on Schedule A between deducting:
   • State and Local Income Taxes: Withholding reported on Form W-2/1099, estimated state/local income tax payments made during the year, and prior-year state income tax balances paid during the current year; OR
   • State and Local General Sales Taxes: Either actual sales tax paid (supported by receipts) OR the amount determined using the IRS Optional State Sales Tax Tables based on income and family size, PLUS actual sales taxes paid on specified major purchases (motor vehicles, boats, aircraft, or substantial home building materials).

Deductible vs. Nondeductible Taxes Comparison

Foreign Income Taxes: A taxpayer who does not claim the foreign tax credit may deduct foreign income taxes on Schedule A, Line 6 as "other taxes." They are not counted toward the $40,000 SALT cap (foreign real property taxes, by contrast, are not deductible at all).

Crucial Distinction for Practice: State, local, and personal property taxes incurred in a trade or business (Schedule C) or in the production of rental income (Schedule E) are deducted above the line as ordinary business expenses and are NOT subject to the $40,000 SALT cap!