| Health care tax deductions can be part of
the solution to help America’s uninsured. With politicians
in both parties having introduced health care tax deduction
bills in the 110th Congress, the following provides some information
on this option and, more specifically, about whether health
care tax deductions can have a meaningful impact on the
nation’s uninsured. |
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| Tax Deduction Questions
and Answers |
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What is a health care tax deduction?
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Health care tax deductions reduce the amount of a filer’s
taxable income – i.e. income subject to federal
income tax – by the amount a filer paid for health
insurance and related medical expenses. |
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What is current federal policy on
tax deductions?
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Currently, filers may claim a tax deduction for medical
expenses only if those expenses amount to more than 7.5%
of the filer’s adjusted gross income (AGI). |
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Under current law, filers who do not itemize on their
tax returns are not eligible for an additional deduction
for health expenses. |
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Can individuals who buy coverage
through their employers deduct this expense?
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No. Because individuals who obtain health insurance
through their employers pay their premiums using pre-tax
dollars, this money is not eligible for an additional
tax deduction. |
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Individuals who buy coverage in the individual market
are eligible for a deduction, but only if those expenses
exceed 7.5% of adjusted gross income. |
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Are the self-employed
eligible for a health care tax deduction?
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Yes. Currently, self-employed individuals may deduct
the full amount of their health-related expenses from
federal income tax, even if these expenses are lower than
the 7.5% AGI threshold. Self-employed individuals also
do not need to itemize to claim this income tax deduction.
However, all health expenses incurred by self-employed
individuals are subject to the federal payroll tax, currently
set at 12.4%. |
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What is the value of a tax deduction?
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The value of a deduction depends on the filer’s
income tax bracket. A filer in the 28% tax bracket who
deducts $1,000 in medical expenses will receive a net
tax benefit of $280 ($1,000 * 28%), while a filer in
the 10% tax bracket who deducts $1,000 in medical expenses
will receive a net tax benefit of $100 ($1,000 * 10%).
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Are health care tax deductions the
most effective means of helping the uninsured?
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Because the value of a tax deduction is directly linked
to a filer’s income tax bracket, a health care tax
deduction is most generous for those with higher incomes
who pay more in federal taxes. |
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For individuals of low and modest incomes, a tax
deduction is unlikely to have much value – particularly
if (as current law requires) the deduction is only available
to those filers who itemize their deductions. For this
population, an advanceable, refundable tax
credit would be the best way to provide access to
affordable health care coverage. |
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| Groups of the uninsured
for whom tax credits would be helpful: |
| Working
Americans |
| Self-Employed |
