(CNSNews.com) – The health care reform legislation outlined by Sen. Max Baucus (D-Mont.) and the Senate Finance Committee includes a provision that would raise the threshold for deducting costly medical expenses from income tax returns. People who do not meet that higher threshold could see their taxes rise.
The exemption, used by cancer patients and those with other costly, chronic diseases, allows people to deduct a variety of medical expenses--those not covered by insurance--from their income taxes, if those expenses amount to 7.5 percent of their adjusted gross income.
According to the Internal Revenue Service (IRS), expenses such as surgeries, chemotherapy, wheelchairs, and guide dogs for the blind can be deducted, ensuring that people who need these treatments are not taxed on the income they use to pay for them.
“Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or treatment affecting any structure or function of the body,” according to the IRS Web site. “The cost of drugs is deductible only for drugs that require a prescription, except for insulin.”
“The cost of items such as false teeth, prescription eyeglasses or contact lenses, laser eye surgery, hearing aids, crutches, wheelchairs, and guide dogs for the blind or deaf are deductible medical expenses,” says the IRS.
Under Baucus’s bill (which is currently available in summary form, not complete legislative language), the threshold would be raised from 7.5 percent to 10 percent, meaning that people whose medical device expenses do not amount to 10 percent of their taxable income would not get the deduction and would have to pay taxes on those expenditures at regular rates.
Taxpayers may deduct only those medical expenses that are not covered by their insurance. If an insurance provider covers a portion of the cost of a treatment or medication, the uncovered amount can be counted as a medical expense.
Raising the threshold on deductions for medical devices as the Baucus plan proposes “would raise taxes on more than 6 million households that face high health care costs, about half of which have incomes low enough that they would qualify for the subsidies these taxes are intended to pay for,” according to the Heritage Foundation.
“The revenue from these taxes is intended partly to offset premium subsidies for households with incomes below four times the FPL, but these taxes would be imposed on Americans who need medical devices or prescription drugs, have high out-of-pocket costs, or pay their own health insurance premiums,” reported Heritage.
“In effect, the Baucus proposal would tax the sick to subsidize insurance for the healthy, and many of the taxes would be imposed on the same people ‘helped’ by the subsidies." (The calculation is for year 2014, the first full year the Baucus plan would be in effect.)
Over 10 years, this tax would generate $15.2 billion, according to the Joint Committee on Taxation, which worked with the Congressional Office to estimate the costs of the Baucus proposal.
The people who could see a tax increase under the proposal are those who are on the upper edges of their tax brackets or who receive a pay raise during the year and who have high medical expenses.
If those medical expenses do not exceed the new, higher threshold, they must be counted as income, a move that can bump someone into a higher tax bracket. Likewise, if a person gets a pay raise, his medical expense deductions could help keep him out of a higher tax bracket. However, if the person’s expenses do not add up to 10 percent of their income, they could face that higher tax rate.
Those facing high medical costs, such as cancer sufferers, are usually advised to “bunch” their medical payments together so they can meet the current 7.5 percent threshold. Bunching medical expenses means reporting payment for medical services when the payment is actually made, rather than when the service is received, in order to count those payments in one tax year.
“Tax experts recommend you consider ‘bunching’ your medical costs. This means treating medical expenses as paid on the date you post your check or on the date you charge the expense to your credit card, NOT on the date you received the medical services,” advises the Web site BreastCancer.org.
“So if you anticipate high medical bills, you should ‘bunch’ payment for those services within one particular year, if possible,” says BreastCancer.org. “Say you have high medical expenses in the upcoming year, and by year's end you know you'll have further expenses in the next calendar year. It may be worth your while to prepay some of those upcoming costs THIS calendar year, so they add to your deductible total, helping bring it over that 7.5% ceiling.”
The Baucus health care bill would make bunching harder to do because it raises the level patients would have to reach in order to deduct the costs of their treatments.
On page 260 (out of 262 pages total), the summary text reads: “This provision increases the threshold for the deduction from 7.5 percent of AGI [Adjusted Gross Income] to 10 percent of AGI for regular income tax purposes. The proposal is effective for taxable years beginning after December 31, 2012.”
Other treatments and expenses that are eligible for deduction, according to the IRS, are:
-- Wheelchair ramps
-- Ambulance fees
-- Braille books and other reading materials for the blind
-- Prosthetic limbs
-- Special education for the blind, deaf, or mentally disabled
-- Organ donation surgery
-- Lifetime care for the permanently disabled