The tax legislation introduced by House Republicans on Thursday will not eliminate the tax penalty for not having health insurance as previously speculated. However, it will remove a long-standing deduction for individuals with significant medical expenses.
This contentious bill aims to overhaul the tax system in the United States by offering considerable tax reductions for both businesses and individuals. Its passage remains uncertain, as Republicans in both the House and Senate appear to be divided on critical issues.
The medical deduction, which dates back to World War II, is available exclusively to taxpayers whose medical expenses exceed 10% of their adjusted gross income.
Due to this threshold and the requirement that it is available only to those who itemize deductions, the medical expense deduction is not frequently utilized — only about 8.8 million individuals claimed it in their 2015 tax returns, according to the IRS.
Those 8.8 million filers claimed approximately $87 billion in deductions; indicating that those eligible for the deduction face substantial out-of-pocket health expenses.
“For many, this represents a significant deduction,” stated David Certner, legislative counsel for AARP, which opposes the proposed changes.
AARP notes that roughly three-quarters of those claiming the medical expense deduction are aged 50 or older, and over 70% earn $75,000 or less annually.
A large portion of these expenses pertains to long-term care, which is typically not covered by health insurance and can cost thousands to tens of thousands of dollars each year.
Sen. Ron Wyden, a Democrat from Oregon and ranking member of the Senate Finance Committee, characterized the bill’s removal of the medical expense deduction as “anti-senior.”
Nevertheless, supporters of the bill argue that the deduction’s elimination should not be viewed in isolation.
The legislation also seeks to abolish billions of dollars in corporate tax credits crucial to the thriving “orphan drug” sector.
On the House Ways and Means Committee’s website, the bill’s advocates denied that these changes would impose a “financial burden.”
“Our bill reduces tax rates and raises the standard deduction so individuals can immediately retain more of their paychecks — rather than depending on numerous provisions that many will never utilize and others may rarely use,” the advocates stated.
Eliminating many existing deductions “is intended to fund rate reductions and increase the standard deduction and child tax credit,” explained Nicole Kaeding, an economist with the business-friendly Tax Foundation. She added that for many tax filers, “there will probably be compensating tax cuts.”
However, these offsetting cuts are unlikely to cover the expenses incurred by individuals with very high medical costs, who are the only ones eligible for the medical deduction.
“This is part of what makes tax reform challenging,” Kaeding remarked.
Notably absent from the proposal — for now — is any mention of eliminating the tax penalty associated with not having health insurance. The so-called individual mandate has been one of the most unpopular aspects of the Affordable Care Act, which Republicans attempted but failed to modify or repeal earlier this year.
Sen. Tom Cotton, a Republican from Arkansas, continues to advocate for adding a provision to the bill that would remove this penalty. President Donald Trump has publicly supported this initiative via Twitter: “Wouldn’t it be great to Repeal the very unfair and unpopular Individual Mandate in ObamaCare and use those savings for further Tax Cuts,” he tweeted on Wednesday.
While the President is correct that eliminating the mandate would create savings, the Congressional Budget Office has predicted that millions of additional Americans would lose their health coverage as a result.
Kaiser Health News, an independent health news organization whose articles are featured in various news outlets, is a part of the Kaiser Family Foundation.
