Medical Deduction Threshold to Increase in 2013
One of the provisions of the health care reform legislation passed earlier this year increases the medical expense deduction threshold from 7.5% of adjusted gross income to 10% of adjusted gross income, effectively increasing the cost of medical care for many taxpayers who itemize on their tax returns, by reducing their medical deductions.
Under current law, taxpayers may take an itemized deduction for any unreimbursed medical expenses, including medical insurance premiums, which exceed 7.5% of their adjusted gross income. Under the new legislation, this deductibility threshold will increase to 10% for years after 2012.
Here is an example of the effect of this change. Assume Henry has an adjusted gross income of $50,000, medical expenses of $5,000, and he itemizes deductions on his tax return. Under current law, Henry would get an itemized medical deduction of $1,250. This is the $5,000 in medical expenses less the deduction threshold of $3,750, (7.5% of $50,000). Under the new law he gets no deduction because his medical expenses would not exceed the new 10% deduction threshold.
It is generally the case that even under the current 7.5% threshold, a taxpayer has to have a lot of medical deductions in order to get an itemized medical deduction on the tax return. Usually these people, their spouse, or other dependents are ill or injured and they are struggling to with the accompanying financial burden. It is said that most personal bankruptcies are caused by the burden of catastrophic medical expenses. One wonders about the wisdom of a tax policy that compounds the financial burdens of taxpayers in this situation by raising their taxes.