Plan Ahead to Ease the Pain of Major Medical Expenses

By Eric Toya

Learn more about Eric on NerdWallet’s Ask an Advisor

Major medical expenses can cause tremendous financial hardship. In fact, a 2013 NerdWallet study found that medical bills are the leading cause of personal bankruptcy.

All medical bills can potentially be overwhelming, but the difference between emergency and anticipated expenses is your ability to plan for the latter.

It pays to think ahead

With planned expenses, you can consider a number of strategies to alleviate the financial strain. But even for unplanned medical issues, planning ahead is smart. Having an emergency savings fund is the best protection against true emergencies. Most financial planners recommend keeping three to six months’ worth of living expenses set aside.

If your health insurance plan is compatible, also consider funding a Health Savings Account, a tax-advantaged savings account for medical-related expenses.

When you know a major procedure is coming, you have time to save up specifically for that expense. Depending on the timing of the procedure or treatment and your ability to save, you should have enough put aside to cover the entire expense without having to take out a loan or carry credit card debt.

4 ways to help reduce your financial burden

Beyond saving as much as you can, here are other ways to reduce the financial burden of major medical expenses:

1. TAKE tax deductions if you can

The IRS allows taxpayers to deduct qualified medical expenses that surpass 10% of their adjusted gross income. Your AGI is your taxable income minus adjustments such as IRA contributions, student loan interest and required alimony payments.

Depending on multiple factors, you can generally deduct a wide range of medical expenses for things such as surgeries, prescription medications, dental and vision care, and fertility procedures. But you typically can’t deduct expenses for cosmetic surgery, teeth whitening, or general health maintenance such as health club dues or vitamins.

Find out whether your treatment qualifies for a deduction. See IRS Publication 502 for a full list of both deductible and nondeductible expenses.

2. Reduce your income

Reaching that 10% tax-deduction threshold is a significant hurdle. One way to overcome it is to reduce your income in the year that you incur major expenses. No one wants to make less money, but it’s possible to reduce your AGI without taking a pay cut.

“Above the line” deductions are those that adjust or reduce your income. Consider these strategies to lower your AGI and thus the threshold to deduct your qualified medical expenses:

• Max out your 401(k) contributions: You can contribute up to $18,000 to your 401(k), with an additional $6,000 “catch up” contribution if you are age 50 or older. If your contributions have been going into a Roth 401(k), this is the time to change to traditional, pre-tax contributions.
• Go back to school: You can deduct up to $4,000 of qualified tuition and fees paid for yourself, your spouse or a qualified dependent, subject to income limits.
• Make HSA contributions: If you have a high-deductible, HSA-compatible health plan, your HSA contribution is an above-the-line deduction. In 2016, you can contribute $6,750 for a family or $3,350 for an individual. An additional $1,000 “catch up” amount is allowed if you’re 55 or older.

3. Bundle your medical expenses

By planning ahead for as many of your medical expenses as possible, you may be able to reach the 10% of your AGI threshold for tax deductions. This means it’s smart to bundle your discretionary medical expenses as much as you can. For example, if you are planning on in vitro fertilization or dental implants, this is also the year that you should get new prescription glasses, enroll in a smoking cessation program or try acupuncture therapy.

Be sure to keep all receipts and good records of all treatments, procedures and prescription medicine. And of course make sure these are qualified medical expenses so you can deduct the expenses once they reach 10% of your AGI.

4. Pay with A credit card

I’m not encouraging you to rack up credit card debt; only consider using a credit card if you can pay the balance in full. But assuming you have enough money saved to do so, it’s worth checking whether your medical provider accepts credit cards, because you might qualify for a hefty sign-up bonus if you make a large purchase on a new card.

Typically, you’re required to spend a certain amount within a given period to earn the bonus. If you have good credit, many cards offer bonuses worth as much as $500 for spending $3,000 to $4,000 in the first few months. If you’ve been thinking about getting a new card anyway, this could be the time to do so. Here are some of the best offers available right now.

The bottom line

A large medical bill probably isn’t how you hope to spend your money, but it’s a reality many will face. And although you can’t always plan for these expenses, when you can, a number of strategies can help ease the financial strain so you’re free you to focus on your health and recovery.

Eric Toya, CFP, is a fee-only financial planner and partner at Navigoe in Redondo Beach, California. 

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