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By Rose Hoban

As Congress returns from its Thanksgiving recess to consider their tax overhaul plan, health care advocates in North Carolina have begun working to oppose several portions of the House bill.

Top of mind for some folks is elimination of the medical expense deduction, which allows for taxpayers with large medical bills to deduct some of those costs from their federal taxes.

For people with disabilities, some retired people and people with big expenses in a given year, the loss of the deduction would be a big hit.

“If your expenses are less than the standard deduction, you don’t claim it,” explained UNC law school professor Kathleen DeLaney Thomas, who teaches tax law.

Thomas explained that if people’s medical expenses tally up to more than 10 percent of their annual adjusted gross income, then a taxpayer can claim that excess amount.

But she noted that unless the total excess expenses are more than the $6,300 standard deduction (or $12,600 for a couple) it doesn’t make sense for a taxpayer to claim the deduction. And some people who could claim the deduction don’t do it because they don’t itemize on their taxes.

How might the medical expense deduction play out?

Taxpayer with gross income: $20,000
Wrist sprain costs: $1,700
Total medical expenses = 8.5% of gross income
Cannot take deduction.

Taxpayer with gross income: $30,000
Broken leg costs: $7,000
Total medical expenses = 23% of gross income
Can take about a $4,000 deduction, but this is still less than the standard deduction. Probably would not take deduction unless other deductions (such as mortgage tax credit, deduction on student loan interest, etc.) total more than $6,300.

Taxpayer with gross income: $50,000
Surgery costs: $23,000
Total medical expenses = 46% of gross income
Probably would take the deduction.

“If you don’t have really big expenses, it’s irrelevant,” Thomas said.

The loss of the deduction would be significant for people with big expenses like for Nancy Nelson, who lives in Chapel Hill and has had multiple sclerosis for decades.

Now 49, Nelson stopped teaching elementary school in her 30s when she could no longer stand at the front of a classroom. She then worked for a while as a research assistant.

“I describe it as a boring desk job with really good benefits,” she said. “I worked as hard as I could for as many years as I could prior to going on disability.”

Nelson is now paralyzed from her neck down and needs a specialized wheelchair. She needs equipment to assist with breathing at night, to get in and out of the shower, and in and out of the house. She also needs a part-time aide to help her with all these tasks while her husband Bob is at work. None of those expenses are covered by insurance, or by Medicaid or Medicare.

Last year, the Nelsons spent more than $37,000 out of pocket.

“My husband is not really looking for retirement, he says, ‘I’ll be working forever,’” Nelson said. “We are lucky in that when we bought our house many years ago, and our mortgage is quite low now.”

Even with “good” insurance

The medical expense deduction dates back to World War II when the American people bore the heavy tax burden of financing the conflict. The Roosevelt administration created the break on expenses over 5 percent of adjusted gross income in order to help those with “extraordinary” health costs. The rate at which the deduction kicks in has fluctuated over the years, until the Affordable Care Act set the trigger rate at 10 percent. The assumption under the ACA was that people would have more comprehensive coverage and so wouldn’t need the tax deduction.

Lindsey and Chad Cox with their children Cleo, 17, Marcy, 14 and Reece, 13. All three children have rare diseases which require extensive treatment and therapy. Photo courtesy: Lindsey Cox

But even with “good” insurance, Lindsey and Chad Cox have had trouble keeping up. Chad makes a little over $60,000 at Thomas Built Buses, a unionized subsidiary of Daimler. They have three children, 17, 14 and 13, with two types of genetic disorders.

“My oldest, has a genetic type of dysautonomia,” said Lindsey, who interviewed with NC Health News at Duke Medical Center while waiting for her children to finish a therapy session. The other two have Van Maldergem syndrome that manifests itself differently in Marcy, 14, and in Reece, 13, but both need extensive physical and occupational therapy.

“An average week, we have eight to 10 copays a week for therapy. It’s a copay every time you walk in the door, it’s not free,” she explained. “And the $30 copay doesn’t sound like much but when you have four therapy appointments in a week, it adds up. By the end of the month, we spend a house payment just on copays.”

The Coxes spent about $20,000 last year on medical expenses and got $4,000 back because of the medical expense deduction.

“We scrape by month to month so much that we can get behind on bills, we don’t get behind that our house gets taken from us, but we can get behind on the mortgage,” she said. “So when we get our taxes, or we save, it goes to catch us up on day-to-day living. For us, it’s the only stopgap we have.”

Lindsey described herself and her husband as conservative, both “card-carrying Republicans.” Her husband voted for Trump, she did not.

“This is my life and this is my income and you don’t have to follow a party line simply because that’s the party you follow, you can pick and choose what side you’re on when it comes to issues, right?” she asked.

But she said she had a “bad feeling” that the medical expense deduction was likely to go away once the Senate and House of Representatives sit down to reconcile their visions of the tax overhaul.

“All a crapshoot”

Last year, only 29.6 percent of tax filers took any deductions. In a study done in 2001, the IRS found only about 7 percent of all tax filers took the medical expense deduction, nothing compared to, for example, the mortgage interest deduction, which was taken by almost everyone who itemized. The people who itemize their deductions are usually solidly in the middle class, according to Gordon Mermin, an analyst with the bipartisan Tax Policy Center, because low-income earners often don’t have enough deductions to top the standard deduction.

According to analyses made by the Center (a project of the Brookings Institution and the Urban Institute), people who make between $75,000 and about $200,000 would see the steepest increases in their tax rates as a result of losing the deduction.

“Even if it were not repealed under the House plan, fewer people would take [the deduction] due to the doubling of the standard deduction,” Mermin wrote in an email to NC Health News. And because higher income people are more likely to itemize, if the deduction remains, the people taking it would skew toward higher income brackets.

“Anyone regardless of income level can have catastrophic medical expenses, e.g. long-term care expenses or expensive rare medical condition, while generally only the rich have very large mortgages, state and local taxes, or charitable contributions,” that are deductible, Mermin wrote.

At the Coxes’ income level, a doubling of the standard deduction could go a long way toward making up for what they would lose if the medical expense deduction goes away, especially in a year where they had lower expenses.

But someone like Art Cooper, 86, would be pummeled by the loss of the medical expense deduction. His wife Jean, 86, has been living in a skilled nursing facility at the Cooper’s continuing care retirement community in Cary, disabled by her rheumatoid arthritis and needing around-the-clock care.

Last year Jean’s expenses totaled more than $130,000.

“Our medical tax deduction was way over $100,000,” Art said. “If we lost that there’s no conceivable way that the increased standard deduction could cover that.”

He said that he and Jean had other Schedule A deductions. Nonetheless, they would be “way in the hole.”

Jean’s money management skills are what’s keeping them both comfortable, Art said. But he also anticipates that Jean will predecease him and “my expenses will plummet to nothing until ill health catches up with me.”

“I can blithely say that we’ll be OK, but …  it could be serious 5 to 10 years from now,” Art said. “It’s all a big crapshoot.”

He said he worried about people younger than him and Jean.

“Although there are people like me who can toss it off for the moment, there are others who will be really hit by it,” he said. “The impression you get is that Congress doesn’t give a damn about that.”

Orphan disease drug credit in Congressional crosshairs
The Hobbs children (l to r) Madison, Melanie, Michael and Meredith. All but Melanie have mitochrondrial disorder, a genetic disease which can cause muscle wasting, fatigue pain and a host of other problems. The three who have the disease each sleep on a ventilator at night and require nursing care. Photo courtesy: Jenny Hobbs

Three of Jenny Hobbs’ children have the same rare disease, mitochondrial disorder. Her middle daughter is currently in a clinical trial at the National Institutes of Health.

“There’s no FDA approved treatments for [my kids’] disease,” Hobbs said. She said when her children were finally diagnosed with “mito” seven years ago, there was no potential therapy on the horizon. Now, there are four clinical trials.

She’s worried about the House tax bill which eliminates a tax credit for pharmaceutical companies that work to develop drugs for such rare, “orphan” diseases, like mito. The Senate bill significantly cuts the credit.

“If they reconcile the two bills, there’s no telling how much, if any of it, will be preserved,” she said. “De-incentivizing private companies from developing drugs – because they’re the ones who are doing the development – is going to be devastating for the rare disease community.”

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Rose Hoban

Rose Hoban is the founder and editor of NC Health News, as well as being the state government reporter. Hoban has been a registered nurse since 1992, but transitioned to journalism after earning degrees...