Tax implications of medical costs
Kim White helps us understand the income tax implications of our medical costs.
When facing unforeseen medical bills it is important to gain a basic understanding of South African tax laws so that you have the ability to claim contributions and expenses in your tax return.
Income tax law and rules can be a little tricky but a good starting point is grasping what the law says and how to apply it to your current situation. It’s also strongly advisable to seek the assistance of a tax practitioner so he/she can well apply the laws and allowances relative to your circumstances.
Do take care in keeping all of your documents so that if South African Revenue Service (SARS) select your tax return for verification, these can be uploaded to ensure that your tax credit is allowed.
The technical stuff
In South Africa the medical expenses deduction was deleted with effect from 1 March 2014 and replaced with a medical expenses tax credit system. This is a rebate which reduces the normal tax that a person pays. Essentially, individuals now have two categories of medical expenses:
- Contributions to a medical aid scheme (registered in SA under the Medical Schemes Act or similar overseas scheme).
- Out-of-pocket medical expenses, being those expenses not covered by the medical aid scheme, referred to as ‘qualifying medical expenses’.
1. The medical scheme fees tax credit is as follows:
|Per month (R)
|For the taxpayer who paid the medical scheme contributions
|For the first dependant
For each additional dependant(s)
2. The medical expenses tax credit (Additional Medical Expenses Tax Credit (AMTC)) is also a deduction from normal tax payable by a natural person, who pays qualifying medical expenses. SARS have provided thorough guidance on these out-of-pocket expenses, being amounts paid and not recovered during the year of assessment. These include:
- Services rendered and medicines supplied by any duly registered medical practitioner, dentist, optometrist, homeopath, naturopath, osteopath, herbalist, physiotherapist, chiropractor or orthopaedist.
- Hospitalisation in a registered hospital or nursing home.
- Home nursing by a registered nurse, midwife or nursing assistant, including services supplied by any nursing agency.
- Medicines prescribed by any duly registered physician (as listed above) and acquired from any duly registered pharmacist.
- Expenditure incurred and paid outside South Africa in respect of services rendered or medicines supplied which are substantially similar to the services and medicines listed above.
- Any qualifying expenses prescribed by the Commissioner as a result of any physical impairment or disability.
How does SARS define a disability?
As ìa moderate to severe limitation of a personís ability to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment, if the limitation:
(a) has lasted or has a prognosis of lasting more than a year; and
(b) is diagnosed by a duly registered medical practitioner in accordance with criteria prescribed by the Commissioner.î
SARS also provides tax relief for a physical impairment, and have the view that a physical impairment is less restraining than a disability as defined. This is understood to be a restriction on one’s ability to function or perform daily activities but only after therapy, medication and the use of any supportive devices, and is less than a “moderate to severe limitation”.
Calculation of AMTC
The AMTC will depend on a person’s age and whether the person, his or her spouse or any of their dependant(s) has a disability as defined.
- A person who is 65 years of age or older, or a person with a disability may claim AMTC as 33,3% of fees paid to their medical scheme as exceeds three times the amount of the medical tax credit plus 33,3% of qualifying medical expenses.
- For persons younger than 65 with no disabled persons in the immediate family, the AMTC is calculated as 25% of the fees paid to their medical scheme as exceeds four times the amount of the medical tax credit plus qualifying medical expenses, subject to a 7,5% limitation, before the 25% factor is applied.
Medical scheme fees tax credit
Jack (main member on his medical aid) and his wife, Carol, have one child. Their total monthly tax credit will be: Jack -R303, plus Carol-R303, plus child-R204 = R810 per month. Thus R9 720 total medical scheme fees tax credit for the year.
Let’s also assume that Jack contributed R5 000 per month to his medical aid; his out-of-pocket expenses for the year were R20 000 and his taxable income earned for the year was R250 000. The calculation for the tax credit on additional medical expenses is as follows:
R60 000 (medical aid contributions) less 4 x 9 720 per overleaf (R38 880) = R21 120, plus out-of-pocket expenses R20 000 = R41 120, less R18 750 (being R250 000 taxable income x 7,5%) = R22 370 (excess amount) x 25% =
R5 592,50 being the amount of the tax credit allowed for additional medical expenses.
Thus Jack’s total medical tax credit for the year will be R9 720 + R5 592,50 = R15 312,50.
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Kim White CA(SA) Postgradcert AdvTax, Postgradcert Inttax, Master Tax Practitioner, CFP – KCE Consulting INC.