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Obamacare imposes two dozen new or higher taxes on American families and small employers.  One of these higher taxes will further limit the ability of families to deduct medical itemized deductions.  This will hit early retirees hardest of all:

• Under current law, medical expenses may be deducted on your taxes.  You must reduce your total medical deductions by 7.5 percent of your adjusted gross income (AGI), known as the “haircut.”  For example, a married couple with $50,000 in income and $10,000 in medical expenses must reduce this deduction by 7.5 percent of their income, or $3750.  They are allowed a medical itemized deduction of $6250.

• Obamacare increases the size of this “haircut” from 7.5 to 10 percent of AGI, starting in 2013.  There is some transition relief for Medicare recipients, but even this goes away in 2017.  As a result, millions of near retirees will find that their ability to deduct medical expenses will be further limited.  Let’s take an example to illustrate:

Betty and Barney Hill are each 63 years old and biding their time before becoming eligible for Medicare.  They each are retired, and have already begun collecting Social Security.  They have income of only $40,000.  Barney needed a medical procedure this year that his insurance didn’t pay for, so it cost him $5000.  They have no other medical expenses.  How much can they deduct?

Before Obamacare, the Hills would have to reduce their $5000 deduction by 7.5 percent of their income ($3000), leaving an itemized deduction of $2000.

After Obamacare, the Hills have to reduce their $5000 deduction by 10 percent of their income ($4000), leaving an itemized deduction of $1000.

Their itemized deductions are reduced by $1000.  Since the Hills are in the 15 percent tax bracket, this increases their taxes by $150.

• It goes without saying that the Hills (and millions of other near-retirees) are not wealthy, and certainly make less than $250,000 per year.  President Obama said repeatedly that he would not raise “any form of taxes” on any families making less than this amount.

According to the IRS, 10.1 million American families claim medical itemized deductions.  A majority of medical deductors make less than $50,000.  Almost no one earning more than $200,000 claims this deduction.  This tax increase is a clear violation of President Obama’s oft-repeated tax promise.
 

Posted by Ryan Ellis on Tuesday, January 18, 2011 4:09 PM EST

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