Tax Breaks For Medical Expenses?

Hmm…

President Bush will propose that Americans be allowed to take tax deductions on more of their out-of pocket medical expenses, as part of an initiative the White House believes will rein in soaring health costs by shifting responsibility toward individuals, according to congressional and other sources familiar with the administration’s thinking.

The new tax breaks for personal health spending, to be included in the 2007 budget Bush will release in less than two weeks, are designed to help the uninsured and to allow people with insurance to write off a greater portion of the money they spend on co-payments, deductibles and care that is not covered. Under current tax rules, people can deduct medical expenses only if they exceed 7.5 percent of their adjusted gross income.

The president also plans to call for an expansion of health savings accounts, an idea long favored by conservatives and approved by Congress slightly more than two years ago, in which people who buy bare-bones insurance policies are allowed to put money into tax-free accounts for their medical expenses.

I am, most of the time, strongly in favor of tax cuts. I am also strongly in favor of health savings accounts. What I am not in favor of is solving our health care problems, which is an important political issue to a lot of Americans, with more social engineering through the tax code. I think this would only serve to make the already confusing maze of deductions, regulations, credits and refunds that is our tax system all the more complicted while actually doing very little to solve the original problem.

How much will tax breaks for medical expenses really help Americans when they still need to hire a lawyer/accountant to make sure their tax forms add up correctly?

I see this announcement as pure political laziness on the part of our President, and a clear indication that the tax reform promised to us by Republicans during their campaigns isn’t coming down the pipe any time soon. After all, if they there are plans to reform the tax code why would Bush still be trying to introduce new, complicated regulations to it?

You can read more from Rob Port at SayAnythingBlog.com

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  • Denny Crane

    Another very naive and simplistic view by Rob.

  • Rob

    What have you got against a simpler tax code and real solutions for the health care problem, Denny?

  • wyguy

    I thought HSAs would be great, then I realized that until Medicare is fixed, HSAs will not work.

    I have Medicare, I see what they pay. In most cases what Medicare allows is a great deal less than what is billed. I only have to pay what is allowed, a HSA would have to pay what is billed. How can that ever work?

  • JohnAnnArbor

    So I’d have to itemize each and every medical bill to get the deduction, adding MORE complexity to the tax code.

    Just what we need, more productivity sucked in by this kind of accounting.

  • sabrina

    So much for Bush’s “let’s create a simpler tax system” agenda that he campaigned on.
    Creating more deductions is not what I had in mind when he said “simplify”.

  • sabrina

    Denny –
    If you think Rob is naive and simplistic, then provide actual details and counterpoints – rather than flinging around lazy insults like you’ve made a profound point.

  • Actually, this is a great first step in the right dicection, but only a step. Our current tax code fosters more dependence, rather than less, on the idea that “someone else will pick up the tab” for one’s medical care. By giving all consumers the same tax breaks that corporations now receive for health care expenses, folks will hopefully start opting for less expensive higher deductible HSA-type insurance. There was a great editorial about this in the WSJ on Jan 13th which can be read at http://www.aei.org/publications/filter.all,pubID.23673/pub_detail.asp

  • I wouldn’t call it social engineering. Being able to deduct medical costs from my taxes won’t make to to change the way I obtain medical care. It just leaves a little more money in my pocket at the end of the year.

    Unless, that is, if you think that taking the family out to eat two or three times a year is social engineering since my behavior has changed for those two or three days.

  • Denny Crane

    Sabrina,

    I’ll post as I choose, thanks.

    Rob:

    How does this add complexity to the tax code? The only thing that will change is the elimination of an arbitrary 7.5% threshold! This effectively simplifies the code by resolving the question of whether people meet the minimum. The deductions will be the same as always, but now they will count for more people. That should be good news for everyone–even people with the best health insurance portfolios.

    I don’t see this as a cure for the “healthcare problem” if there is such a thing. I see this as a step toward more consistency and sanity in tax policy, and a benefit to everyone.

  • Jake

    The 7.5% was put in the code as a tax simplification measure. Very rarely do people exceed that percentage so people can forget about keeping receipts or doing the bookkeeping. It only applies to the very few people who have medical catastrophes.

    It is one less thing to audit and it means that tax auditors can spend their time on more fruitful inquires.

  • Denny Crane

    Jake,

    That’s kinda silly. Who doesn’t keep medical receipts? How hard is it to file the EOB’s? Come people, that is not a burden, that is responsible record keeping.

    I think most families come pretty close to the threshold, thereby requiring the computations–especially lowering income families.

    Imagine: Two kids with braces, a broken tooth from the skateboard, counselling for the second kid, contact lenses for two, and a surprise hospitalization for one. If your adjusted gross income is less than $100,000, you’re close to the threshold even with the best insurance.

    More importantly, the 7.5 percent threshold makes no tax policy sense, considering the rest of the scheme.

  • that is responsible record keeping.

    Not everyone lives and dies by the billable hour, Counselor.

  • The complex and incomprehensible tax code exists as a tool for trading power, influence and wealth among connected Washington insiders. It will NEVER be abandoned. It goes against human nature, and I never bet against human nature.

  • Denny Crane

    McGehee:

    Huh? You don’t save receipts? What about warranty cards? What about stereo or camera or computer boxes? Maybe I’m a pack rat, but that has nothing to do with billable hours. It’s more about self protection and common sense.

    People with significant medical expenses have many incentives to toss their receipts in a drawer–not just for tax reasons. If they don’t, they can easily obtain their EOB’s from the insurer. If they’re not insured, then their incentives are even greater for many reasons. The bottom line is, clear-thinking responsible people should keep this stuff–it’s easy. Duh.

    Now there may be even more incentive for more people. And you’re bitching about it? You’re too friggin’ lazy to qualify for a nice tax break? I don’t get it. Really.

  • Jim Price

    Denny Crane, huh? Thats the only part of your post that makes complete sense. There’s already an arrogant fool with that name, and since he’s on TV, you can’t be him. But you get one hundred percent for a flawless imitation. 🙂

    Adding more regs for healthcare deductions to the tax code doesn’t make it simpler- it makes it all the more complicated. It also gives naive Americans the false idea that the government cares, when all they’re really doing is giving back a little more of what they stole in the first place.

    If they really wanted to unscrew the tax system, they could also eliminate the barriers to healthcare and everything else a man needs to provide for his family, all in one shot- by just shooting it down like the horribly unjust thief that it is.

    If man was truly free and owned the fruits of his own labor, he could provide for his household instead of slaving away to pay off government thugs.

  • I actually think that this will get Bush some support from the “mainstream” of America. The details were a bit vague in this post on how this would work, but it definitely seems like a good idea. I mean sure it’s not a perfect solution, but at least there will be better options for people to cut down on their healthcare costs.

    Bottom line: it’s better than nothing.

  • Baggi

    Rob,

    I just did my taxes in about 3 hours with Turbo Tax. I made a combined income (That is to say my income, plus stocks and other assets) of approximately $110,000.

    It might be as complicated as everyone is saying, but it sure didn’t seem like it. And I spent about 5k on medical insurance this year. It would have been very helpful if I could have deducted that!

  • See also this excellent post.

    To me fiddling with tax policy ought not be seen as necessary, but since we’re already neck deep in social tinkering, and it’s never going to go away and let the market work (the market was warped starting with employers getting involved during WW2 as a workaround for moronic wage freezes, and has just gotten worse since), then why not. Trouble is, if all you do about medical expense deductions is reduce the percentage threshhold while leaving it a schedule A item, you do no good for most of the people who could use the help the most.

  • Baggi, wouldn’t that be great? Self-employment gets part of that deduction, but it only helps so much when your insurance plus out of pocket co-pays and such come to $1000 a month.

  • Casey

    I don’t fully understand Health savings accounts, but they were offered as part of my benifits package. I did not elect to participate because as I understand them, I contirbute a portion of my earnings to the account (tax free) that I can use to pay for medical expenses. The problem is that any funds in the account I do not use for that year are lost. I don’t know where the money goes but the documentation I got explaining my benifit package clearly states that funds not used during the year are lost. Thats the main reason I did not elect to use one.

  • MjM

    The concept sounds dandy, but while it may sound simple to some I’d bet a dollar to a dime that by the time the final bill gets approved – if it ever were to get approved – it would be jam-packed with exclusions/special interests/limits/ect./etc.

    Then comes next year and the year after and so on; otherwise known as “tweaking”. This is where Rob is spot on: it will instantly add, at minimum, tens of pages to the existing 10-million word tax code. Over time it will perhaps add hundreds more. So goes the natural evolution of tax law.

    Consider the simple question, “Can I deduct aspirin?”, and you understand where proposals like this are headed.

    Such is is not what we should be striving for.

  • If it were kept simple(“total of medical expenses you paid for here_________”), it would be great. Yeah, you’d have to save the receipts; I already do that. And it would damn well put more of my money back in my pocket.

  • bnorm

    Casey,
    In my HSA, any money contributed and not used during that year rolls over to the next year. It is never lost. For Flex Spending Accounts, any unused money is lost after the end of the year. For my situation, an HSA is perfect.

  • Denny Crane

    Jim Price,

    You’re an idiot.

    “Adding more regs” is not what is happening. What they’re doing is removing one arbitrary reg to simplify things–that is the 7.5 percent threshold.