JOHANNESBURG – Over the past two years, the tax benefits individuals enjoy for medical aid contributions and expenses, have gradually changed from a deduction to a tax credit system.
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 March 1 this year.
Wessel Smit, member of the South African Institute of Chartered Accountant’s (Saica) national tax committee, explains that a tax credit reduces an individual’s tax liability. This differs from a medical deduction, which lowers an individual’s taxable income.
A medical tax credit allows all taxpayers the same benefit in rand, whereas a medical tax deduction is more beneficial to a taxpayer with a marginal tax rate of 40% than someone who pays 18%, he says.
The disadvantage 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.
Credit on medical fund contributions
Tax credits on medical funds contributions were already introduced on March 1, 2012. Currently the credit is R242 per month for the main member and the first dependent and R162 per month for additional dependents, but it is likely to be adjusted for inflation from March 1, 2014, Smit says.
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 March 1, 2014.
Other medical expenses
Up until the end of the current tax year (2014), taxpayers were entitled to a deduction for qualifying medical expenses (other than medical fund contributions) not recovered from the medical scheme. The deduction was determined using a specific formula in the Income Tax Act.
From March 1, 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 who are disabled or who has a dependent with a disability.
Smit says with regards to taxpayers younger than 65, 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 derive at the tax credit for medical expenses.
For taxpayers 65 years and older, or younger than 65 but with a disability or a disabled dependent, the benefit will be much more substantial.
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 derive at the medical expenses credit.
In terms of the Income Tax Act, qualifying medical expenses include services rendered and medicines supplied by registered medical practitioners, as well as specialists and homeopaths, hospitalisation in a registered hospital or nursing clinic, home nursing by a registered nurse, midwife or nursing assistant, prescribed medicines from a pharmacist and medical expenses incurred and paid outside South Africa.