Ten million middle class families with large medical expenses will find themselves paying higher income taxes thanks to an Obamacare tax taking effect on Jan. 1, 2013. The average family subject to this new tax makes just over $53,000 and will face a tax increase of between $200 – $400 per year.
Here’s how it works:
There are twenty new or higher taxes in Obamacare. One of these taxes is an income tax increase on families with catastrophic medical expenses. Americans for Tax Reform refers to this tax increase as the "high medical bills tax."
Present tax law. Under present tax rules, families are 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 (FSAs) or health savings accounts (HSAs). A full list of qualified expenses can be found in IRS Publication 502.
After totaling all unreimbursed, out-of-pocket medical expenses, the taxpayer must 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.”
-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 was able to successfully deduct about $8,000 in medical expenses with an average "haircut" of $4,000.
-That means the average taxpayer claiming this deduction earns just over $53,000 annually.
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, this is a clear violation of President Obama's "firm pledge" in 2008 to not enact "any form of tax increase" on these families.
It is not surprising that this tax increase cannot be on the wealthy. Because of the “haircut,” very high-income families are locked out from claiming this deduction at all. For example, a family earning $1 million would have to reduce out-of-pocket medical expenses by $75,000 under present law, or $100,000 under Obamacare. Either way, it's very unlikely this household can take advantage of this tax benefit.
In addition, this 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. That's a good definition of the opposite of “affordable” or “caring.”
According to the Joint Tax Committee, this tax increase is scheduled to raise between $2 billion and $3 billion annually. That may be a drop in the bucket in Washington DC, but try telling that to the $53,000 family with high medical bills that just saw a tax increase.
ATR estimates that the average tax increase for the average family claiming this tax benefit will be $200-$400 per year.
President Obama and his Democrat congressional allies have some explaining to do.