In 2015, about 8.8 million individuals and families took the medical-expense deduction on their taxes, reducing their collective tax liability by an estimated $87 billion. The deduction is especially helpful for families who care for children with special needs, according to a new report from CNBC.
Will Families Lose The Medical-Expense Deduction?
When a family or individual filer spends more than 10% of their adjusted gross income on qualified medical expenses, they can deduct those payments from their taxes. But under the Tax Cuts and Jobs Act, the Republican tax reform bill currently making its way through the legislature, that deduction, along with a number of other itemized deductions that benefit relatively-small portions of the population, would be eliminated.
The medical-expense deduction is a big help for people with disabilities and their families, a certified public accountant in Los Angeles told reporters. The deduction, the accountant notes, is usually taken by families who make at least $60,000 every year, since families with lower incomes normally take the standard deduction. “Their children are going to receive fewer services because of this,” she continued, “because the money has to come from somewhere.”
Increase In Standard Deduction
The standard deduction is set to double under the Congressional tax reform plan. That’s why itemized deductions are being eliminated, to off-set the increase in a deduction that nearly 70% of American households choose to take. And alongside these changes, the GOP bill would raise the child tax credit from $1,000 to $1,600, Axios reports.
But $600 is a drop in the bucket when you’re spending over $50,000 every year in medical expenses alone on your child’s health. The accountant we mentioned earlier believes that, if enacted, the Republican proposal could raise the tax bills of her client families by between $2,000 and $60,000. It all depends on how much you deduct, which is directly connected to how much your family spends on medical care every year. Families who need to pay more to help their children stay healthy would be hit the worst.
Tax Changes Will Alter Care Decisions, Expert Says
Of course, taxes aren’t just about money; they structure the decisions we make. When taxes go up, people tend to spend less on whatever’s being taxed. So effectively raising the tax on medical care could lead parents to switch to lower-quality care or less care.
Some experts fear that increasing the tax bill for families of children with special needs is going to force some of her clients into an impossible choice: care for your child inadequately or go broke. “Our clients are very concerned that losing this deduction is going to significantly impact how they can treat their children,” a tax accountant told CNBC.
Attorneys: Prepare Today For Change Tomorrow
“Families with special-needs members just need every break they can get,” says a Colorado-based financial planner whose daughter has Down syndrome. The advisor used the medical-expense deduction himself when his daughter, still a newborn, was hospitalized for six weeks. “It’s not like we made money on it,” the father continued, “but it made a difference to being able to provide for my family.”
While the Republican tax bill hasn’t been passed (and signs of dissension in the Congressional ranks suggest that passage is anything but assured), tax professionals who work with special needs clients are getting ready for big changes.
A tax attorney in New Jersey is counseling his clients to prepare for the worst. “If you have anything significant that you need to buy, now’s your chance,” the lawyer told reporters. “That’s become part of our year-end tax-planning advice.” A second lawyer, who advises high-net-worth families, agrees. “If you’ve been thinking about renovating your house