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The medical expense deduction, explained

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House Republicans' tax bill does not try, again, to repeal the Affordable Care Act.

Instead, it takes aim at a much smaller health care program: a deduction for exceptionally high medical expenses. Today I want to run through how that program works — and what would happen if it goes away.

What is it? The medical expenses deduction allows people with especially high health care costs to deduct that spending on their tax reform. To qualify, you must spend at least 10 percent of your income on medical expenses. The IRS maintains a lengthy list of what counts as medical spending that includes some things you might expect, like fees paid to doctors or spending on prescription drugs. And there are some things you might not expect. Turns out, one can deduct the price of joining a weight loss club or attending a conference related to one's own health conditions. Self-employed individuals are typically able to deduct their insurance premiums, too.

Where did it come from? The medical expense deduction goes all the way back to the United States Revenue Act of 1942. Keep in mind this is two decades before Medicare and Medicaid were created. There was much less of a safety net for those with especially high medical bills.

There is some evidence that the deduction was meant to be a temporary postwar measure, as Kelly Phillips has previously detailed for Forbes. A Senate Finance Committee report on the 1942 tax bill justifies the medical deduction as follows:

This allowance is recommended in consideration of the heavy tax burden that must be borne by individuals during the existing emergency and of the desirability of maintaining the present high level of public health and morale.

About 80 years later, however, it's quite clear that this was not a temporary provision but rather a permanent part of the tax code. The only thing that has changed is how much medical expense one needs to qualify for the deduction. Most recently, the Affordable Care Act raised the threshold from 7.5 to 10 percent of income.

Who uses it? An estimated 8.8 million Americans use the deduction for medical expenses. This makes it one of the smaller deductions — it's nowhere near the size of the mortgage deduction, for example.

Most deductions benefit wealthier Americans, who are more likely to itemize their deductions in the first place. But the medical deduction is actually a bit different: It is used more by poorer tax filers than those who are especially rich.

The Congressional Research Service estimates that 3 percent of tax filers who earn less than $20,000 use the medical expenses deduction, compared to less than 1 percent of people earning more than $1 million.

And this, in a way, makes sense: Most people who earn more than $1 million have health insurance. In order to get above the 10 percent threshold, they would have to spend at least $100,000 out of pocket on medical expenses in the course of one year.

But someone who earns $20,000 would only need to spend $2,000 on medical expenses to cross the 10 percent threshold. And this is also a demographic that is less likely to have health insurance coverage.

What happens if the medical expenses deduction disappears? Most obviously, tax filers would no longer be able to deduct their medical expenses. And, as described earlier, this is one of the provisions of the tax code that currently helps a small subset of low-income Americans.

The AARP has opposed the elimination of the medical expense deduction. "Eliminating the medical expense deduction amounts to a health tax on millions of Americans with high medical costs — especially middle income seniors," the group said in a statement. "AARP is strongly opposed to this provision."

Republicans, meanwhile, have argued that other changes in the tax bill would offset the loss of the medical expenses deduction for those who lose it. But as Dylan Matthews writes, this bill has winners and losers. Those who are wealthiest do best, while poor families would lose out under the current proposal.

Chart of the Day

Zeke Emanuel proposes new "affordability index" — and it shows health care getting less affordable


A novel approach to measuring health costs. Zeke Emanuel, Aaron Glickman, and David Johnson propose in the Journal of the American Medical Association a new "affordability index" as a way to measure health costs in America. It essentially compares the mean cost of employer-sponsored coverage to median household wages to get a sense of how big a burden health costs come out to be. It shows health care (unsurprisingly!) has gotten less affordable over the past two decades. Read more here.

Kliff’s Notes

With research help from Caitlin Davis

Today's top news

Analysis and longer reads

  • “Health Companies Race To Catch UnitedHealth As Amazon Laces Up”: “As soon as news surfaced last week about the potential merger of CVS Health and Aetna, all eyes turned to the looming threat from Amazon. The online retailer’s flirtation with the pharmacy business is a factor, no doubt. But many industry experts say CVS and Aetna have another huge competitor on their minds: UnitedHealth Group.” —Chad Terhune, Kaiser Health News
  • “House Republicans Aim To Eliminate Tax Credits For Orphan Drugs”: ‘As part of a sweeping tax overhaul bill, House Republicans on Thursday proposed eliminating billions of dollars in corporate tax credits that have played a key role in the booming industry to develop drugs for rare diseases.” —Sarah Jane Tribble, NPR
  • “Skepticism over Iowa’s Medicaid math led AmeriHealth to pull out”: “Iowa state officials refused to provide data used to justify Medicaid payment rates to a private management company that canceled its contract with the state this week, according to documents obtained by the Des Moines Register.” —Jason Clayworth, Des Moines Register

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