As House Republicans work to pass legislation overhauling the nation’s tax code, they should follow the lead of their Senate counterparts whose companion bill maintains the medical expense deduction for the millions of Americans now grappling with steep health expenditures for catastrophic health events, costly chronic diseases or to provide ongoing care to aging, infirmed or disabled family members.
Under current law, the Internal Revenue Service (IRS) allows taxpayers to deduct qualified medical expenses that exceed 10 percent of a person’s adjusted gross income for the year. These expenses, according to the IRS, include insurance premiums, devices and long-term care, as well as the "costs of diagnosis, cure, mitigation, treatment, or prevention of disease and the costs for treatments affecting any part or function of the body."
Although the medical expense deduction has been an option for taxpayers since 1942, it is not widely used due to the high hurdle for taxpayers to qualify. In fact, a recent IRS analysis revealed that only 8.8 million tax filers included the deduction for medical expenditures in the 2015 tax year, representing 19 percent of the itemized returns.
Yet, what is important is who these 8.8 million Americans represent. As documented in a September 17, 2017 report from the Congressional Research Service (CRS), “Itemized Tax Deductions for Individuals: Data Analysis,” these individuals are the very taxpayers the Republican tax plan is intended to help – middle-class people with incomes well below $200,000 a year and most frequently making between $50,000 and $100,000 a year. Additionally, AARP estimates that about three-quarters of those who claim the medical expense deduction are 50 or older, and more than 70 percent have annual incomes of $75,000 or below.
From the standpoint of the federal budget, the cost of maintaining the medical expense deduction will be minimal. Estimates from the Treasury Department put the cost at about 10 billion a year in lost tax revenues in 2018 and about $144 billion over the next 10 years. By contrast, the toll on middle-class Americans if they lose this deduction will be substantial and painful, especially when they face a life-threatening diagnosis, a crippling accident, a progressive disease like Alzheimer’s, or are caring for an older adult or a child with special needs.
According to the same 2016 IRS analysis, the 8.8 million Americans who took the medical expense deduction in 2015 claimed $87 billion in expenses not covered by health insurance. In some situations, these costs came from out of nowhere and were out of the taxpayer’s control. In other cases, the deduction was a way to defray some of the unpredictable or unmanageable costs of care without going into medical debt, including high co-insurance, high deductibles, having to seek out-of-network care, and needing a treatment that is not covered by the person’s health plan.
For example, many middle-class taxpayers now use the medical expense deduction to help cover the uncompensated cost of long-term care for aging family members, including nursing homes and assisted living facilities. To put these costs into perspective, the average annual cost of a private room in a nursing home was about $92,000 in 2016 and $82,000 for a shared room. In the same year, the average annual cost of a home health aide to provide care was $31,000. On an individual level, this can mean payments of $7,000 a month for an elderly loved one.
Similarly, middle-income Americans now use the itemized medical expense deduction to help manage their out-of-pocket costs for chronic diseases like cancer. According to the American Cancer Society, in 2014, cancer patients paid nearly $4 billion out-of-pocket for their treatment. Additionally, a 2016 study from researchers at the University of Southern California (USC), Boston Children’s Hospital and the Rand Corporation estimates that parents, including many with limited means, provide nearly $36 billion annually in uncompensated medical care at home to children who have special health care needs, such as muscular dystrophy and cystic fibrosis.
While far from exhaustive, these examples underscore the need to maintain the medical expense deduction, which is certainly not overused and helps the middle-class pay for needed care for themselves and their loved ones while staying afloat. Today, one in five working age adults with health insurance have difficulty paying medical bills and as a result, are spending less on food, clothing and basic household items, using up most or all of their savings, taking an extra job or working more hours, increasing their credit card debt, and borrowing money from family and friends.
One way to help these Americans is by continuing to allow taxpayers with high medical costs to deduct these expenses from their income taxes. It is a low-cost, common sense policy that improves people’s lives.