As millions of families are facing cancellation of their health insurance plans due to Obamacare, many will be subject to higher-than-anticipated out of pocket medical costs. Unfortunately this coincides with an Obamacare income tax increase starting in tax year 2013 which makes these higher medical bills more difficult to bear.
The Obamacare law contains 20 new or higher taxes. Even before news of the widespread insurance plan cancellations, IRS data indicates ten million middle class families with high medical expenses would find themselves paying higher income taxes thanks to the so-called Obamacare High Medical Bills Tax, a provision that took effect on Jan. 1, 2013. According to IRS data, the average family subject to this new tax makes just over $53,000 and will face an income tax increase of between $200 - $400 per year.
Background: Americans have long been allowed to deduct out of pocket medical expenses as an itemized deduction on their taxes. They cannot have already benefited from other tax provisions for health care like tax-free employer-provided care or tax-free accounts like flexible spending accounts or health savings accounts. (A full list of qualified expenses can be found in IRS Publication 502.)
Before this tax hike provision took effect, the taxpayer would total all unreimbursed, out-of-pocket medical expenses and then subtract from this figure an amount equal to 7.5 percent of the taxpayer's adjusted gross income (AGI). This subtraction amount is known commonly as a "haircut."
According to the IRS, 10 million families took advantage of this tax deduction in 2009, the latest year of available data. They deducted $80 billion in medical expenses after applying the “haircut.” The Office of Management and Budget reports that this tax deduction saves these taxpayers upwards of $10 billion annually.
Obamacare's tax hike: The Obamacare law made one change to this tax provision: it raised the "haircut" from 7.5 percent of AGI to 10 percent of AGI. Since virtually all taxpayers claiming this income tax deduction make less than $200,000 per year, the income tax hike falls almost exclusively on the middle class:
-Virtually every family taking this deduction made less than $200,000 in 2009. Over 90 percent earned less than $100,000.
-The average taxpayer claiming this deduction earns just over $53,000 annually.
-ATR estimates that the average income tax increase for the average family subject to the new tax will be $200 - $400 per year.
-This income tax increase is focused on families with the largest medical bills that weren't covered by insurance. So the target population is low-and-middle-income families with debilitating medical costs.
According to the Joint Tax Committee, this tax increase is scheduled to raise between $2 billion and $3 billion annually.
The number of Americans subject to this tax will undoubtedly rise due to the crush of Obamacare-induced insurance cancellations. President Obama and his Democrat congressional allies have some explaining to do.