Medical Tax credits – explained

For the past few years, the use of a monthly “capped amount” was allowed as a deduction against an individual’s taxable income. The capped amount was based on the number of dependants on the taxpayer’s medical scheme – i.e. up to R720 for each of the first two dependants, then R440 for each additional dependant.

Where the actual contributions made to the medical aid scheme exceeded the allowed capped amount, this difference together with any monies paid for other allowable medical expenses was then used to determine any further allowable medical deduction – only the excess above 7.5% of taxable income would be claimed against taxable income for the taxpayer.

Until the 2012 tax year, all expenses for persons over 65 years and those with a disability (as defined by SARS) for the taxpayer, spouse and/or child, could claim all medical expenses regardless of capped amounts or the 7.5 % limitation.

From the 2013 tax year, SARS has changed the capped amount system and has replaced it with a Tax Credit system. Now fixed monthly amounts, regardless of the actual contributions made, are allowed that reduce the actual tax payable to SARS (i.e. R230 for each of the first two dependants and R154 for each additional dependant).

The credit system is similar to a tax rebate which is deducted after the calculation of an individual’s tax payable.

In determining an individual’s taxable income, medical aid scheme contributions may now be claimed in so far as they exceed four times the medical tax credit allowed. Other allowable medical expenses paid by the taxpayer could still then be claimed, but only the excess above 7.5% of taxable income would be allowed as a deduction against taxable income for the taxpayer.

For taxpayers over 65 years and those with a defined disability, all expenses, regardless of the limitations, may still be claimed.

However, in terms of the draft Tax Administration Amendment Bill, SARS is proposing further changes from 1 March 2014 onwards relating to the taxation of the additional qualifying medical expenses and conversion of these into the medical tax credit scheme and removing the 7.5% limitation currently in place as follows:

SARS will allow additional tax credits for the qualifying medical expenses paid (out of pocket expenses) with the use of special formulae:

  • Persons over 65 or persons with a disability:

    – The standard medical tax credit would apply for the taxpayer, spouse and dependants, plus

    – An additional credit of 33.3% of medical scheme fees in excess of three times the value of      the standard medical tax credit allowed above, plus

    – A credit for 33.3% of all qualifying medical expenses/out of pocket expenses

  • Persons under 65 and no disability:

    – The standard medical tax credit would apply for the taxpayer, spouse and dependants, plus

    – An additional credit of 25% of the amount by which (X + Y) exceeds 7.5% of the taxpayer’s            taxable income (see below example)

    X = equals amount by which the actual amount of medical scheme fees paid by taxpayer in a         tax year exceeds four times the standard medical scheme credits; and

    Y = equals all the annual qualifying expenses

Assume X = R10 000 and Y = R25 000
Assume R225 000 taxable income x 7.5% => R16 875
Difference between R25 000 and R16 875 = R8 125
Therefore additional tax credit allowed to reduce tax payable = R8 125 x 25% => R2 031.25

A disability for income tax purposes is defined by SARS. In order to claim your medical expenses under disability, the taxpayer, spouse and/or child must be seen by a registered practitioner and a special SARS declaration must be completed and signed to confirm the diagnosis of a disability (ITRDD). Such a declaration must be renewed every 12 months for temporary disability and every 5 years for permanent disability.

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