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Why don't I get a tax deduction for Out of Pocket Medical Expenses? Source code 4008 shows R0

Posted 3 July 2013 under Tax



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Tax season always throws up some interesting and confusing calculations, but for the 2013 tax year it would seem the most confusing of all is how medical aid contributions and Out of Pocket medical expenses are treated.

New to 2013 tax season is the Medical Aid Tax Credit. Now instead of your contributions to medical aid being deducted from your income earned in order to work out your tax, there is instead a tax credit against the actual tax paid. For the 2013 tax season the medical aid credit is R230 per member for the first two members per month and thereafter R154 per member per month. The aim of this is to even out the tax benefit regardless of income levels. This applies to taxpayers who are younger than 65 years of age. Taxpayers 65 years and over will have all their medical expenditure allowed as a deduction.

Examples:

1 person: R230 x 12 = R2,760 medical aid credit
1 person with 1 dependent: (R230 x 2) x 12 = R5,520 medical aid credit
1 person with 2 dependents: ((R230 x 2) + R154) x 12 = R7,368 medical aid credit

TaxTim has received many questions asking why, on their tax return assessments (ITA34), there is no amount for medical deductions - code 4008, even when they have entered a value. In previous years there was always a figure included next to this code.

There are two reasons: the first being the new tax credit system, and the second being the result of the very complicated formula SARS uses to calculate whether your Out of Pocket medical expenses must reduce your total tax owing. The calculation depends on the income you earn and in many taxpayers' cases there actually is no reduction because the required threshold is not met.

The calculation is as follows:

  1. Combine your Out of Pocket medical expenses (expenses not recouped by a medical scheme) with your total medical aid contribution, less 4 x the medical tax credits for the year (as seen above).

  2. Calculate your taxable income and multiply it by 7.5%.

  3. If your answer to number 1 is greater than the answer to number 2, then that difference will be allowed as a tax deduction.


Example:

1 person: R230 x 12 = R2,760 medical aid credit

Out of Pocket medical expenses = R10,000
Medical Aid contribution for 1 member = R1,000 x 12 months = R12,000
Taxable Income = R100,000

Excess medical credit = R12,000 - (4 x R2,760) = R960
Excess + Out of Pocket Medical Expenses = R960 + R10,000 = R10,960
Taxable income x 7.5% = R7,500

Therefore the allowable medical deduction for code 4008 = R10,960 - R7,500 = R3 460

Play around with the numbers to see if you can deduct your Out of Pocket expenses or take the easy option and try our free Tax Refund calculator.

Remember to keep all proof of payment and pharmacy documents for your Out of Pocket medical expenses in case SARS asks for proof.

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