House Republicans passed their version of the tax reform bill on November 16th. One of the most concerning provisions is the elimination of the medical expense deduction, which permits those who itemize their federal income tax deductions to deduct medical expenses that exceed 10% of their annual gross income. Deductible “medical expenses” include health insurance premiums, fees paid to health care providers, payments made for prescription drugs, and payments for transportation essential to medical care.
According to a recent Commonwealth Fund survey, close to one-fifth of U.S. adults spend 10 percent or more of their income on medical expenses, not including premiums. In 2015, 8.8 million people claimed a total of $87 billion in medical deductions on their tax returns. The contrast between the relatively low number of claimants and the high amount claimed in deductions indicates that this deduction is used by people who face steep out-of-pocket medical expenses. Further, while most other itemized deductions benefit those with incomes over $200,000, the medical expense deduction is mostly claimed by tax filers with incomes between $50,000 and $200,000. Eliminating this tax deduction would primarily affect middle-class families with high medical expenses. The New York Times profiled a number of such Americans who rely on this deduction, including a 54-year old woman with breast cancer, a couple with a son who was born with spina bifida, and a couple undergoing in vitro fertilization.
In 2016, the federal government capped out-of-pocket payments for those purchasing private insurance through the marketplace at $13,700 for a family plan, and this is the maximum amount a family could be made to pay in addition to their premiums. In 2016, the average unsubsidized family paid just under $10,000 for premiums alone. So, a family of four with income just above the threshold for premium tax credit eligibility, $97,000, could face up to $23,700 in medical expenses in a year. It is not hard to see how critical the medical expense tax deduction could be for a middle-class family that has a member with cancer or a chronic condition requiring a lot of medical attention.
This tax bill comes on the heels of the Trump Administration’s decision to discontinue cost-sharing reduction payments to insurance companies, which will result in even higher premiums for middle-class families who are ineligible for premium tax credits. While the Senate’s version of the tax bill leaves this deduction untouched, it would repeal the Affordable Care Act’s individual mandate penalty, causing middle-class premiums to rise even higher.
Congressional leaders hope to hammer out the differences between the House and Senate bills soon, with the goal of getting it to the President’s desk by the end of the year. This legislation is moving quickly, but the millions of families harmed by the elimination of the medical tax deduction need to pay attention.