Under New Tax Plan, the Cost of Aging Could Rise
The US government’s House of Representatives and Senate are currently debating two tax bills that could significantly affect the cost of aging. The revised tax bills could potentially erase a deduction for medical expenses, removing thousands of dollars in support for the sick and elderly. The medical deductions are permitted when they exceed 10 percent of a household’s adjusted gross income. The House bill has proposed removing this deduction entirely, whereas the Senate bill plans to leave medical expense deductions untouched. If the House bill is successful, those who spent more money on health expenses this year stand to lose more money in 2018. The AARP Public Policy Institute has evaluated IRS data from 2015 and calculated that 8.8 million Americans use the deduction annually, including the elderly, those with children with special needs, and the disabled. Around 55 percent of those claiming the deduction were over the age of 65, with 69 percent having incomes under $75,000. The average sum claimed was $9,904. Around 52 percent of those who are older than 65 will require extended care before they die, federal data has found, making the deduction important for many Americans requiring assistance. The Republicans in Congress could use the eradication of the deduction to penalize states with higher income taxes by reducing the deductibles that are permitted. However, it is likely that the move will cause sick and elderly citizens to rely more on state provisions through Medicaid, putting more pressure on the federal government.

Imagine two couples, both alike in incomes, in a state without income tax where we lay our scenario. They have $150,000 in income and $100,000 in medical expenses and take no other itemized deductions.

Now imagine that one gets a deduction for medical expenses and one does not. Using the 2017 tax brackets and a rule that would not allow medical deductions unless they exceed 10 percent of adjusted gross income, a couple that could access the deduction would end up with $15,547 more at the end of tax season than one that could not deduct and thus paid more in taxes, according to calculations that Ruth A. Sattig Betz, an accountant in Farmingdale, N.Y., ran for me.

Take the income down to $75,000 (where the extra $25,000 for the medical costs to pay the $100,000 in bills would come from sources or savings that are not subject to income tax) and the household with the ability to take the deduction would end the year with $6,826 more.

So the medical expenses clearly matter, a lot. “Two households may have identical incomes, but they do not at all have identical capacity to pay taxes,” said Cristina Martin Firvida, AARP’s director of financial security. “And it’s not because of a choice that one of them made.”

Indeed, to critical observers, it looks like Republican leaders in Congress are using the tax code to punish states with high income taxes. They use the bill to accomplish this by limiting how much of those state income taxes are deductible. That effectively penalizes some of those residents, who did choose to live in those states, with a higher total tax bill.