A Big Tax Question: What Happens to the Medical-Expense Deduction?
More than 9 million Americans deducted roughly $87 billion in medical expenses on their tax returns in 2015, according to the latest Internal Revenue Service data. If President Trump's proposed tax changes become law, that write-off could be repealed.
One of those using the write-off is Paul Gregory, a 57-year-old resident of Plano, Texas, who was diagnosed with Amyotrophic Lateral Sclerosis five years ago. Mr. Gregory says that despite having insurance, he's spending $130,000 per year out-of-pocket for round-the-clock care, which has consumed all of his retirement savings and a large part of his wife's.
One cushion to the financial blow has been that these costs are tax-deductible.
Hearing of the potential change "was a real body blow," said Mr. Gregory, who communicates via email because he can no longer speak.
Both the current tax framework proposed by Trump and its predecessor, issued in April, call for ending all "itemized" deductions on Schedule A other than those for mortgage interest and charitable donations. That puts medical-expense write-offs in lawmakers' cross hairs.
For many Americans weighing Mr. Trump's efforts to simplify the tax code, broaden the tax base and lower rates, the idea of ending medical deductions has created the largest emotional reaction. Not surprisingly, when The Wall Street Journal asked readers to send us their questions about Mr. Trump's plan, questions about health care were prominent.
Removing the deduction wouldn't raise as much revenue as ending deductions for state and local taxes, which are also on the endangered list. Some 45 million filers deducted more than $550 billion in these levies in 2015.
That's because write-offs for medical expenses have a high hurdle. In 2017, taxpayers can only deduct unreimbursed expenses that exceed 10% of their adjusted gross income.
Above the threshold, however, a wide variety of out-of-pocket costs is deductible, including many that may not be covered by insurance. These include nursing-home costs, insurance premiums paid with after-tax dollars, prostheses, eyeglasses, and even a wig, if needed after chemotherapy, among others. (For details, see IRS publication 502.)
The upshot is that taxpayers who do qualify for medical deductions are often facing serious and costly health issues requiring services or treatments not covered by insurance. Often they aren't eligible for Medicaid.
It's too early to know what will happen in the end to the medical expenses deduction. Moreover, even if it's removed, sick Americans could benefit from other changes such as lower tax rates.
Kyle Pomerleau, an economist with the Tax Foundation, says that in addition to practical considerations lawmakers must consider whether it's appropriate to use the tax code to deliver health-care benefits.
A spokeswoman for the American Health Care Association, a trade group representing long-term care providers, says it is still "studying the implications of the proposal."
For those who are worried the deduction may end, tax experts caution against prepaying 2018 medical expenses this year in order to take a deduction. The IRS could disallow such write-offs entirely instead of postponing them. Courts have sided with the IRS on this issue.
There is an exception. Under current law, the part of the entrance fee to a "life-care" facility or retirement applicable to medical care could be deductible in 2017 even if the person doesn't enter until 2018. This is a complex topic and taxpayers who want to take such write-offs should seek professional advice.
In the meantime, expect many Americans to lobby for the benefit to remain.
Among them is Rod Bean, a retired aerospace engineer living in Orange County, Calif., who says the deduction enables him to "barely afford" the nearly $40,000 cost of a group home for his 70-year-old wife, who has early-onset dementia.
He is astonished that lawmakers are thinking of ending the write-off, given the large and growing segment of the population that's aging. "These expenses aren't a choice, like taking out a mortgage or giving to charity," he said.
Write to Laura Saunders at laura.saunders@wsj.com
(END) Dow Jones Newswires
September 29, 2017 18:06 ET (22:06 GMT)