How Ending the Medical Tax Deduction Might Affect You

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The just-released GOP House tax plan includes a proposal that would end the tax deduction for medical expenses. If you and your family pay a lot for your own or a loved one's medical care—or might face big medical expenses in the future—you could be affected.

You don't have to be ill to have high medical costs. Pricey premiums for long-term-care insurance, currently deductible, no longer will be under the new tax proposal. And if you have a steep health insurance deductible, you'd no longer have the benefit of writing off that substantial cost, either.

According to the IRS, nearly 8.8 million households filed returns claiming the medical expense deduction. That's more than 19 percent of all itemized returns, and 5.8 percent of all returns filed in 2015, the latest tax year for which information is available. If in future years you experience high medical costs, the loss could take a significant bite out of your finances.

A High Hurdle to Claim Deduction

Currently, you can deduct only that portion of medical expenses that exceeds 10 percent of your adjusted gross income (AGI), the figure shown at the bottom of your Form 1040. (Until this year, that 10 percent threshold was 7.5 percent for those 65 and older.)

But for those who use the deduction, the benefit can be substantial. And this is not a break mainly for well-to-do taxpayers. Half those claiming the deduction reported income of $50,000 or less, says AARP.

Among those with AGIs of $15,000 and under who claimed medical expenses, the average medical expense claimed was a whopping $8,787, more than half of those households' entire adjusted gross income, according to Wolters Kluwer Tax and Accounting, a tax information provider based in Riverwoods, Il.

The loss of the deduction "may be especially impactful for a small subset of households that are experiencing significant medical expenses," says Michael Kitces, a financial planner based in Baltimore, in a recent blog post analyzing the Republican-sponsored Tax Cuts and Jobs Act.

Who Could Get Hit Hardest

Current tax law broadly defines what can be deducted as a medical expense. Right now, the costs of laser eye surgery can be deducted. So can in vitro fertilization treatments. Cancer patients can include the cost of wigs. Parents can deduct remedial reading lessons for a dyslexic child, or travel expenses to visit a child in rehabilitation if recommended by a doctor.

But observers say the people most likely to suffer from the loss of the tax break are families of individuals with very costly disabilities and diseases, and the elderly. 

• The disabled and their families. Under the current law, a household with a disabled family member can deduct numerous expenses not covered by insurance, including therapies of various kinds, prosthetics, high-cost drugs, and even home improvements that make the residence more accessible. Blind and deaf people can deduct the cost of maintaining a service animal. That would go away under the new law. 

Families with disabled members "can find themselves drowning in medical expenses, even if they have health insurance," says Larry Levitt, senior vice president for special initiatives at the Kaiser Family Foundation, based in Menlo Park, Ca. "The insurance doesn’t necessarily cover everything" the disabled person needs.

• Households facing a catastrophic illness. The unreimbursed expenses for very costly diseases, including experimental drug therapies, could not be deducted under the proposal.

• Those with high medical insurance deductibles. According to the Centers for Disease Control, nearly 40 percent of individuals have high-deductible health plans, which can cost a family as much as $13,000 in the event of a major illness. Writing off the cost of those deductibles would no longer be an option.

"The Affordable Care Act placed a cap on total out-of-pocket expenses in insurance plans, but that cap doesn’t apply to out-of-network services or treatments not covered by insurance," says Levitt. "Those bills can accumulate quickly for someone with an expensive medical condition requiring specialized care."

• Older people. Fifty-five percent of those taking the medical deduction are 65 and older, says AARP. If those 50 and older are included, the figure rises to 74 percent.

Unreimbursed home care costs, assisted living expenses, and long-term care policy premiums would no longer be deductible. To afford those costs not covered by insurance, many seniors may have to liquidate pretax retirement accounts, Kitces says.

The median cost for a one-bedroom unit in assisted living, which typically is not covered by Medicare, was $3,628 per month, or $43,536 annually, according to a 2016 survey by Genworth, a long-term-care insurance provider.

"In the past, at least the medical expense deductions largely offset the taxable income created by liquidating those accounts," Kitces notes.

Future Outlook

The bill is far from final. The Congressional Budget Office still has to "score" it, estimating its long-term costs. The Senate must introduce its version, and the two bills must be reconciled. And of course, lobbyists will be visiting congressional offices in droves in the coming weeks to make their cases to include or remove various elements in the legislation.

AARP and patient advocacy groups will be among them.

"Helping people with a medical deduction is a similar concept to helping people affected by hurricanes," says AARP director of financial security Cristina Martin Firvida. "We help people hit by hurricanes all the the time, and we should do the same for people hit by major illness."

In fact, the tax bill addresses people beset by those types of catastrophes, too. Unless they live in a region designated by the President as a disaster area, they, too, will no longer be able to write off their catastrophic losses.

—Penelope Wang contributed to this article. 

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