With Health Care Expenses on the Rise, What Will Become of Current Tax Deductions?

Regardless of where you stand on the health care debate currently taking center stage in U.S. political discussions, there is one thing we all can agree on – health care is expensive, very expensive. Whether in the form of health insurance premiums, prescription drug costs or hospital bills, health care expenses can make a substantial impact on any family’s budget.

As consolation, the IRS allows taxpayers to deduct various health care expenditures. However, in order to qualify, taxpayers must have amassed qualifying health care expenditures exceeding 7.5% of their adjusted gross income (AGI), after which all remaining expenditures may be added to their itemized deduction.

Change is on the Horizon?
While health care expenditures are one of the most frequently asked about deductions, rarely do any of our clients qualify. This may all change soon if Representative Clifford Stearns from Florida’s sixth district has anything to say about it.

In January Representative Stearns sponsored H.R. 198, which is designed to allow insurance and prescription drug expenses to be deducted entirely (thus no longer making them subject to 7.5% of the taxpayer’s AGI). H.R. 198 raises some question marks with regard to the treatment of additional medical expenditures, including hospital stays and dental expenses. It often takes the combined affect of health insurance premiums and additional medical expenditures to help a taxpayer utilize the health care expense itemized deduction. With premiums out of the picture, the 7.5% of AGI qualification may need to be adjusted to benefit taxpayers who accumulate a large amount of medical expenses.

It is still uncertain whether the resolution will see the light of day or face rejection like the majority of bills and resolutions referred to committee. Previous versions of this resolution died with the committee during the past five sessions of Congress, and there are no signs that H.R. 198 will break that trend. At the time this post was written, H.R. 198 was still in the hands of the House Committee on Ways and Means.

Flexibility is Needed
Without any significant change to the American health care system, one thing is certain – health care expenditures per capita will continue to rise for years to come. In fact, a recent report from the Urban Institute highlights that consumer health care expenditures may be on a sharp rise in the years to come. Their research indicated that individual and family spending on health care will increase by 45.9% in a best case scenario, and 68% in a worst case scenario.

We are not advocating for or against reform in the American health care system, but we do believe that the IRS code surrounding the health care expenditure deduction will eventually have to address the growing strain placed on taxpayers from rising medical expenses.

Relief for 2009
As described in our recent post “2009 Tax Code Changes Affecting the Unemployed,” the IRS is addressing the costs of COBRA for taxpayers. There have also been significant adjustments to the Health Coverage Tax Credit, which will now pay 80% of the health insurance premiums for taxpayer who lost their jobs due to increased imports or shifts in production outside of the United States. To receive for this credit, taxpayers must qualify for Trade Adjustment Assistance. You can learn more about this program here.

If you would like more information about health care resolutions and tax credits, you can visit these websites:
H.R. 198: Health Care Tax Deduction Act of 2009
Health Coverage Tax Credit