How much of my medical aid contribution is tax deductible? It’s a good question and one we get asked on a fairly regular basis so it’s about time I knuckled down and actually got this blog post written. Private healthcare in this country doesn’t come cheap, so who isn’t interested in finding out how much of that heavy monthly medical aid spend they can claim back from the guys at SARS each year!
Summer on the Highveld is in full swing and I’m committed to getting up nice and early each morning this week (a cuppa- java in hand) to crunch out what I think is going to be an important bit of copy for you to read. While the whole tax deductibility of medical aid contributions and expenses can get a bit tricky, I’m going to try my level best to keep the explanation in this blog post as simple as possible. Actually to better illustrate the tax calculation I’ve also included a video at the end of this post, so make sure you give it a watch.
Before we move ahead with the nitty-gritty of the article it’s important to note that the information in this blog post is based on the tax year ending Feb 2011 (so no holding me accountable next year when the information is out-dated). I’ve also only focused on a scenario where you, the medical aid member, are paying the entire medical aid contribution. In the next (2) blog posts I will tackle contributions by your employer and terms like “fringe benefits”.
What you really need to know is that SARS gives you (2) opportunities to use your medical aid contributions and medical expenses as deductions each tax year.
The first tax deduction opportunity comes in the way of a standard medical aid contribution deduction per member and dependants on your plan.
For the purpose of this blog post, let’s call this first calculation (A)
|Medical Aid Contribution Deduction Allowed by SARS
If you, your wife, and your child are on a medical aid scheme the maximum deduction from a contribution standpoint you would be able to claim would be R1,750 per month.
How did I calculate that?
Principal Member R670 per month (that would be you), plus 2nd Dependant R670 per month (that’s your wife), plus Remaining Dependant R410 per month (that’s your child) = R1,750 per month.
Everyone owning a medical aid plan qualifies for this primary deduction (A) and it’s a pretty straight forward calculation.
If this is starting to sound a little Greek, just stay with me because right at the end the video is really going to help it sink in..I promise.
The 2nd allowable deduction is a little more tricky and not everyone will qualify for it.
It’s simply based on all medical expenses not claimed (including all contributions to a medical aid scheme not already claimed in calculation A) and factors your income into the calculation.
So over and above the standard contribution deduction above, SARS allows you a second bite at the tax deduction cherry.
For the purpose of this blog post let’s call the 2nd calculation (B)
Let’s assume you are on a medical aid plan with a medical savings account (MSA). Halfway through the year you’re out of savings so all your day-to-day expenses need to come out of your own pocket. Let’s assume that it was a nightmare last six months of the year and you racked up some heavy medical expenses which your medical aid didn’t pay for. You could be a candidate for the 2nd deduction allowed by SARS.
Now let’s look at calculation (B) – Unclaimed medical expenses (Remember, this includes medical aid contributions not already claimed under calculation A above).
What is important to note with this calculation is that in order to qualify for the deduction you need to overcome a hurdle rate laid down by SARS.
Your unclaimed medical expenses must be more than 7,5% of your gross income in that particular tax year after having deducted calculation (A) from your gross income.
Let’s look at an example to better illustrate this.
Martin belongs to a medical aid as the principal member. His wife and child are dependents. Martin’s total monthly contribution towards his medical aid each month is R3,315 or R39,780 per year. Now let’s work out the first step in the calculation (A).
Remember that calculation (A) deals with the tax deductibility of Martin’s medical aid contributions only.
- Main Member – R670 pm or R8,040 annually (Martin)
- Second Dependant – R670pm or R8,040 annually (Martin’s wife)
- Remaining Dependent – R410pm or R4,920 annually (Martin’s child)
- Total – R1,750pm or R21,000 annually
So while Martin is contributing R3,315 per month towards his medical aid plan each month, from a tax deduction standpoint he is only allowed to claim back R1,750 per month via calculation (A).
So what about his extra contributions of R1,565 per month or R18,780 per year that Martin can’t claim?
Good question. Martin could claim these additional medical aid contributions plus any other unclaimed medical expenses provided he qualifies for the second deduction (B). If the sum total of these additional expenses is more than 7,5% of Martin’s gross income less calculation(A) above, then Martin’s in business.
Let’s move on with the example.
The good news for Martin is that he does have a few unclaimed medical expenses. After his medical aid savings facility ran out mid-year, he spent another R15,000 on GP & Specialist bills which his medical aid didn’t pick up.
Are these unclaimed expenses along with Martins unallowed medical aid contributions enough to get him over the hurdle rate set by SARS? Let’s have a look.
Martin’s Gross Income – R360,000 per annum
Less deduction (A) – R 21,000 (contribution deduction)
Equals – R339,000
R339,000 x 7.5% = R25,425 (hurdle rate)
Before I move on it’s important to note that Martin needs to clear this hurdle rate set down by SARS before he is able to qualify for the (2nd deduction).
Unclaimed expenses – R15,000 (medical expenses Martin didn’t claim)
Plus contributions not deducted – R18,780 (the rest of Martin’s medical aid contributions)
Remember earlier we mentioned that Martin only qualified for R21,000 from a contribution deduction standpoint. What about the rest of the money he spent on medical aid contributions? Now in this calculation, we get to add back those contributions he couldn’t deduct.
So we add the unclaimed medical expenses Martin racked up (R15,000) with the contributions that Martin couldn’t deduct in the first calculation (A) R18,780 and we get to a figure of R33,780.
R15,000 (unclaimed medical expenses) plus R18,780 (contributions disallowed) = R33,780.
We simply take that figure less the hurdle rate set by SARS which in Martin’s instance was R25,425.
R33,780 – R25,425 (hurdle rate set by SARS) = R8,355
Brilliant, so in this particular instance, Martin does qualify for a 2nd tax deduction over and above R21,000 allowed from a contribution deduction standpoint.
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