Over a two year period we have seen the tax treatment of medical aid contributions and expenses change from a deduction to a tax credit system. The medical tax credit system allows all taxpayers the same Rand benefit, whereas a medical tax deduction is more beneficial to a taxpayer with a marginal tax rate of 40% than one who only pays 18%.
The disadvantage of the tax credit system however is that if an individual’s tax liability in a given tax year is not sufficient to utilise all the tax credits available, the benefit will be forfeited (and not be carried over to the next year).
While the deductions for medical aid contributions have already been replaced with a medical credit system for most taxpayer categories, deductions for qualifying medical expenses will also be replaced with a credit system from 1 March 2014. While the credit system has been in use for taxpayers younger than 65 and taxpayers younger than 65 with a disability or a disabled dependent, it will be applicable to all taxpayers – including taxpayers 65 and older who contribute to a medical fund from 1 March 2014.
So what changes?
Until the end of the 2014 tax year (the tax year ending 28 February 2014) taxpayers are entitled to a deduction for qualifying medical expenses (other than medical fund contributions) not recovered from the medical scheme. The deduction is determined using a specific formula in the Income Tax Act.
From 1 March 2014 this deduction will also be replaced by a credit, which will be more favourable to taxpayers who are 65 years and older and taxpayers below age 65 years who are disabled or who have a dependent with a disability.
For taxpayers younger than 65 years the credit for medical expenses will be determined as follows:
The medical tax credit for 12 months (with regards to medical aid contributions) will be multiplied by four and subtracted from the total medical aid contributions for the year. The qualifying medical expenses the taxpayer incurred during the year that exceeds 7.5% of the taxable income will be added to this amount. This total will be multiplied by 25% to arrive at the tax credit for medical expenses.
The credit for medical expenses applicable to taxpayers 65 years and older, or younger than 65 but with a disability or a disabled dependent will be determined as follows:
The medical tax credit for 12 months will be multiplied by three and subtracted from the total medical aid contributions for the year. All qualifying medical expenses will be added to this amount. This total will be multiplied by 33.3% to arrive at the medical expenses credit.
For these calculations it is important for taxpayers to understand what constitutes ‘qualifying medical expenses’. These are defined in Section 18(1)(b) of the Income Tax Act as:
- Medical practitioner, dentist, optometrist, homeopath, naturopath, osteopath, herbalist, physiotherapist, chiropractor or orthopaedist for professional services rendered or medicines supplied; or
- Nursing home or hospital or any duly registered or enrolled nurse, midwife or nursing assistant (or to any nursing agency for the services of such nurse, midwife or nursing assistant), for illness or confinement; or
- Pharmacist for medicines as prescribed by any person referred to in (1).
These expenses will be taken into account in determining the medical allowance, provided these expenses have been paid for the benefit of the taxpayer, his or her spouse, his or her children or the children of his or her spouse or any of his or her “dependants” as defined in section 18(4A).