How to Calculate Adjusted Qualified Living Expenses Form 8863

What is Adjusted Qualified Living Expenses (AQLE)?

AQLE is the amount of qualified living expenses that are adjusted for inflation. Qualified living expenses are expenses that are necessary for the maintenance and care of the individual and their spouse. These expenses include:

• Medical expenses
• Dental expenses
• Long-term care insurance premiums
• Funeral and burial expenses
• Taxes on qualified long-term care insurance contracts

The AQLE amount is used to determine the amount of Social Security benefits that can be excluded from taxable income. The exclusion is calculated by subtracting the AQLE amount from the total Social Security benefits received.

Formula for AQLE Calculation

The AQLE amount is calculated using the following formula:

Where:

• Qualified Living Expenses - The total amount of qualified living expenses for the year
• Inflation Adjustment Factor - The factor used to adjust the qualified living expenses for inflation
• Additional Amount - An additional amount that may be added to the AQLE amount

The Inflation Adjustment Factor is determined based on the year in which the expenses were incurred. The additional amount is determined based on the individual's age and the year in which the expenses were incurred.

How to Calculate AQLE

To calculate AQLE using Form 8863, follow these steps:

1. Determine the total qualified living expenses - Add up all the qualified living expenses for the year.
2. Determine the inflation adjustment factor - Use the inflation adjustment factor for the year in which the expenses were incurred.
3. Calculate the adjusted qualified living expenses - Multiply the total qualified living expenses by the inflation adjustment factor.
4. Add the additional amount - Add the additional amount to the adjusted qualified living expenses.
5. Enter the AQLE amount on Form 8863 - Enter the AQLE amount on Line 1 of Form 8863.

Once you have calculated the AQLE amount, you can use it to determine the amount of Social Security benefits that can be excluded from taxable income.

Worked Example

Let's walk through a worked example to illustrate how to calculate AQLE.

Example Scenario

John is 65 years old and has incurred the following qualified living expenses in 2023:

• Medical expenses: $5,000
• Dental expenses: $1,000
• Long-term care insurance premiums: $2,000
• Funeral and burial expenses: $1,500
• Taxes on qualified long-term care insurance contracts: $500

The inflation adjustment factor for 2023 is 1.05, and the additional amount for a 65-year-old in 2023 is $1,000.

Calculation Steps

1. Total qualified living expenses = $5,000 + $1,000 + $2,000 + $1,500 + $500 = $10,000
2. Adjusted qualified living expenses = $10,000 × 1.05 = $10,500
3. AQLE amount = $10,500 + $1,000 = $11,500

John's AQLE amount for 2023 is $11,500. This amount can be used to determine the amount of Social Security benefits that can be excluded from taxable income.