This content is provided by the Americans for Tax Reform Foundation.

Current Law

Taxpayers who itemize their returns can deduct medical expenses that exceed 7.5% of Adjusted Gross Income (AGI). Taxpayers who calculate the Alternative Minimum Tax (AMT) may deduct for medical expenses in excess of 10% of AGI.

Scheduled Changes

Beginning January 1, 2013, the 7.5% AGI floor for the medical expenses deduction will increase to 10% for all taxpayers, with a three-year exemption for seniors (age 65 and above) and their spouses.

ATRF Analysis

Raising the AGI floor on the medical expenses deduction is, in effect, a tax on high medical bills. Taxpayers with recurring medical expenses who qualified for the deduction in 2012 may fall short of the AGI requirement in 2013, potentially increasing their tax burden by hundreds of dollars.

For example, an average American household with income of $45,000 and high medical expenses will lose up to $1,125 in deductions as a result of the tax. Assuming the full amount of disallowed deductions and a marginal tax rate of 15% in the aftermath of Taxmageddon, this will increase the family’s tax burden by $169.

A household with income of $100,000 and high medical expenses, meanwhile, would lose up to $2,500 in deductions. At a marginal rate of 28% (again courtesy of Taxmageddon), this will raise the family’s tax burden by $700.

This punitive increase is regressive as well. Taxpayers subject to the AMT, who tend to be wealthier than average, already calculate their medical expenses deduction based on the higher, 10% floor. The Taxmageddon increase on ordinary Schedule A filers, then, will almost exclusively affect middle-income taxpayers. This will be devastating to many Americans who are already financially vulnerable to medical catastrophes.

The tax increase includes a three-year exemption for seniors and their spouses, and it’s not hard to see why. Seniors are an electorally powerful group who generally incur high medical expenses, so granting them a reprieve delays opposition toward the tax until it has a foot in the door. Come 2016, young and old alike will face the 10% AGI requirement.

Because medical-related bankruptcies are so prevalent—according to researchers, they make up somewhere between 17% and 54.5% of all bankruptcies—, it is especially reprehensible to increase the tax burden of those struggling with high medical costs. Yet that is precisely what the Obamacare change to the medical expenses deduction does.

10-Year Cost to Taxpayers

Joint Committee on Taxation: $15.2 billion

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