What May Happen to Your Medical Tax Deduction

Millions of taxpayers who deduct medical expenses each year are right to be concerned.

Congress is attempting to make massive changes to both America's health-care system and tax code. With those changes in mind, worried readers of Tax Report have written to ask what the impact will be on the one issue that is common to both: the medical-expense tax deduction.

The simple answer is there is a range of possible outcomes due to conflicts in the proposals. And users of this deduction can't do much in the meantime other than write to Congress and avoid strategic mistakes.

The uncertainty shifted into high gear on April 26, when President Donald Trump released tax proposals strongly suggesting the health-care deduction should be eliminated. The one-page handout from the White House called for protecting only the write-offs for home ownership and charitable gifts, and for cutting "targeted tax breaks that mainly benefit the wealthiest taxpayers."

While this language seems to aim squarely at the deduction for state and local taxes, it also describes the one for medical costs. In both, the tax benefit is proportional to the filer's rate -- and that typically rises with income.

Yet two days later, the House of Representatives passed a health-care bill with a little-noticed provision that goes in the opposite direction. Instead of cutting the medical deduction, the House expanded it by lowering the income threshold from 10% to 5.8%, beginning in 2017. Under this rule, more people would be able to claim the write-off, and those who already do could deduct more.

In response to a query about this conflict, a spokeswoman for the House Ways and Means Committee said House Republicans are working with Mr. Trump and the Senate "to significantly lower tax rates and substantially increase the standard deduction so that all Americans will no longer need to rely on complex itemized deductions."

Experts, however, say the House's expansion of the break may just be a temporary budget tactic. The more generous write-off could be replaced by the Senate with another provision, such as a larger tax break for older Americans who purchase individual health insurance.

The medical-expense deduction could also survive intact for 2017, especially if Congress doesn't finish major tax changes this year.

Overall, about 7 million returns are expected to claim a medical-expense deduction for 2017. That is paltry compared with the 34 million who will claim mortgage interest and 43 million writing off state and local income taxes. One major reason so few take advantage is that the write-off has a high hurdle: for 2017, taxpayers can only deduct medical costs greater than 10% of their adjusted gross income.

"If a taxpayer qualifies for a medical deduction, it usually means there's a serious health issue," says Andy Mattson, a CPA with Moss Adams LLP in Campbell, Calif.

But for those who do qualify, it is crucial help with outsize medical expenses not covered by insurance. A wide variety of costs are also deductible -- including bandages, breast pumps, acupuncture, contact lenses, guide dogs, nursing-home care, certain tutoring, transportation and meal costs and even a wig after chemotherapy. (For more details, see IRS Publication 502.)

Supporters of the deduction point out that such costs are less a matter of choice than getting a mortgage or giving to charity.

Ralph Jorgenson, an 81-year-old retired architect in Mercer Island, Wash., says he is using the medical deduction to help with bills of $11,200 a month for his wife, who has been in a memory-care facility since last September. "I worked all my life. I'm carrying a burden now, and I should be entitled to it," he adds.

For Mr. Jorgenson and others using the write-off, Mr. Mattson cautions against prepaying 2018 medical expenses in 2017 in order to get a deduction. The Internal Revenue Service could disallow such write-offs entirely, not just delay them, and courts have sided with the IRS on this issue.

There is also an exception for those who want to prepay. Under current law, part of the entrance fee to a "life-care" facility or retirement home applicable to medical care could be deductible for 2017, even if the person doesn't enter until 2018, Mr. Mattson adds. This is a complex topic and taxpayers who want to take such deductions should seek professional help.

Write to Laura Saunders at laura.saunders@wsj.com

(END) Dow Jones Newswires

May 12, 2017 05:44 ET (09:44 GMT)