How US Tax Reform Affects Patients with Chronic Illness

It was messy, but it is finally done and over with! On December 22, 2017 the tax reform bill, or 'a giant tax cut ' as President Trump calls it, has finally been passed by both houses and has been signed into a law.

It is not immediately obvious how the tax plan impacts patients with chronic illnesses. Views in the media are often tainted by the political prism through which the commentators tend to look at this issue. Plus there is limited discussion of the specific provisions that can affect patients with chronic illnesses.

In this post, I am outlining some of the major provisions of the final bill that may affect chronically ill patients. Bear in mind that I am not a professional in accounting and taxation. However, I seem to have had more than my fair share of tax problems and as a result, I have become overfamiliar with the IRS website and publications.

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To make it easier to wrap our brains around this complex piece of legislation, I have divided the post into two sections -  changes that will increase your net income and changes that will decrease your net income.

(Side note: if you're not familiar with the terms like deductions, exemptions and credits, read the primer on tax terms)

Let's start with the optimistic news first.

Tax Provisions That Will Increase Your Net Income 

Direct impact

Reduction of the threshold for medical deduction from 10% to 7.5%: Deduction of medical expenses was actually eliminated in the earlier versions of the tax bill. Had it been removed from the final version, it would have the potential to significantly impact healthcare costs for fibromyalgia patients. However, not only the deduction was retained, but the threshold to get the deduction was also reduced from 10% to 7.5% of AGI for the years 2018 and 2019.  It is important to list out some of the medical costs that are deductible as many patients are unaware of it. Indeed, researching the tax deductions for my medical costs was the last thing on my mind during the first year of my illness. Here is the list of medical expenses that patients with chronic pain, or for that matter, patients with chronic medical conditions, may find useful to deduct. (for detailed documentation, look at IRS publication 502)

1. Pain Management Devices like TENS and cold laser.(Side note: you must try one of these if you have not already). You will need a doctor's note to support your case.
2. Travel costs to visit a doctor. These include gas and parking. You can also deduct expenses towards airfare, boarding, and lodging. Expenses incurred by a person traveling along with the patient are also included
3. Experimental Procedures -many pain management procedures like Botox injections are not covered by health insurance because they may be considered as experimental. The out-of-pocket expenses to cover these can be deducted.
4. Health Insurance Premiums-any premiums that you pay to your health insurance company is tax deductible
5. Alternative Treatments like acupuncture, chiropractic adjustments, and osteopathy.
6. Physical Therapy - Typically insurance will cover only certain visits. The rest of them have to be paid out of pocket and are eligible for deduction.
7. Disability Aids like crutches, wheelchair and mobility scooters (side note: if you are able to work with the help of Assistive Technology, then you can deduct it as a business expense)
8. Home Modifications like guardrails. You can even deduct the cost of a swimming pool if prescribed as necessary for exercises by the doctor
9. Caregiver Services - If the patient is unable to do at least 2 activities of daily living, the expenses towards caring and helping the patient to activities of daily living can be deducted.
10. Nursing services - The services can actually be provided by a person who is not a qualified nurse. You will have to separate out the portion of the payment made for nursing services from the payment for other household chores like cooking, cleaning, et cetera.

Reduced Income Tax Rate : The income tax individual rates from 10%, 15%, 25%, 28%, 33%, 35% and 39.6% to 10%, 12%, 22%, 25%, 32%, 35% and 37% respectively. The income threshold for the new rates are
         -- 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)

         -- 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
         -- 22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples)
         -- 24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples)
         -- 32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples)
         -- 35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples)
        -- 37% (over $500,000; over $600,000 for couples)

In summary, the rates have been reduced by around 3% for most of the tax categories.

Indirect Impact

Increase in Limit of Standard Deduction: The standard deduction has been almost doubled from $ 6350 to $ 12,000 for single filers and from $ 12,700 to $ 24,000 for married filing jointly. However, it must be noted that the personal exemption of $ 4050 per person has been eliminated. So the tax relief is actually not much. For example, a single filer who typically takes standard deduction of $ 6350 will also add a personal exemption of $ 4050. So her taxable income would actually be reduced by an amount of $ 6350 +  $4050 =  $ 10,400. With the tax reform, the taxable income would be reduced by $ 12,000, which is actually a change of $ 1600.  The increase in standard deduction is supposed to expire by 2025 unless Congress takes action. This has been highlighted in the mainstream media as unfriendly to the middle and lower class because the decrease in corporate tax rate, usually presumed to benefit the rich, is permanent without any expiry date.(Read: Republicans explain why their tax cuts are temporary)

Reduction in taxes for the pass-through corporations: Due to the unpredictable nature of many illnesses, many patients with chronic illness to work full-time regular jobs. With the increase in work from home and online jobs, there is a good possibility that patients may be owning a business as a sole entrepreneur. The business may be run as an LLC or as an S corporation. The tax reform legislation reduces the taxes on this to 20%. However, there are many restrictions to this. For example, this would not apply if the business is in the professional field. As a result, doctors, lawyers, and accountants will not be able to take advantage of this.

Child Tax Credit: Families with kids under 17-year-old will benefit with the doubling of child tax credit to $ 2000. I have included this because this has a widespread impact and therefore has a potential to increase the net income of many households with chronically sick patients.

Bullishness in Stock Market: Many patients with chronic illnesses are unable to work and have to depend on their savings to pay their bills. Since fibromyalgia is not a fatal illness, patients may have to plan their finances for long-term and may, therefore, be pushed to consider investing in equities. With the reduction in corporate taxes, the stock market is expected to continue its upward move. This will help their portfolio grow. However, there are a number of factors that can affect the stock market and the benefit is tangential if any.

Provisions That Will Decrease Your Net Income

Direct Impact

Fortunately, I could not find anything that would have a direct adverse impact on the net income.

Indirect Impact

Reduction in Deduction Available for State and Local Income Tax Among the most notable ones of the provisions of the tax reform legislation is the limited deduction of up to $ 10,000 available for state and local income tax. This obviously affects residents of states where there is a high rate of state and local income tax. The fact that most of these states support Democrats is probably not a coincidence. According to this link, $ 6400 is the average estate tax paid by Californians. With this in mind, the $ 10,000 amount should probably cover the state and local taxes paid by lower and middle-class households in California and, by extension, to the rest of the country where the state tax rate is much lower.

Faster Adjustment of Tax Bracket: The tax reform bill stipulates using chained CPI as a method of measuring inflation. The effect of using chained CPI is that tax payers will be pushed into higher tax bracket faster.

Repealing of Obamacare Individual Mandate The individual mandate was supposed to force healthy people to purchase insurance, thus lowering the premiums for everyone, including the chronically sick. Repealing individual mandate may increase the premiums. The Congressional budget office estimates that as many as 13 million people will eventually lose their health insurance by 2027. For patients who are going to lose their health insurance, this has a direct and a very significant impact. However, if a person is able to get Social Security, she will be able to get health insurance through theMedicare program.

Adverse Impact on the Earnings of Charitable Organisation If you're depending on any kind of program from a charitable organisation, for example, a hospital run by a charity, you may see a reduction in their outreach programs. This is because the tax reform law eliminates deductions on donations made to charity. This will discourage people to donate thus adversely impacting the funding of charitable organizations.

Possible Cuts in Welfare Schemes like Medicare: With the reduction in the tax burden, the federal government is forecast to run a deficit up to $ 1.5 trillion. In order to cover the shortfall, it is generally believed that Republicans will make deep cuts in the welfare schemes. Social Security may be kept out of it though. Republicans maintain that they would not make any cuts. It remains to be seen whether they would be able to fulfill their promises.

Conclusion

The tax reform legislation seems to reduce the tax burden on most of the chronically ill patients in the near term. However, in the long-term, it has the potential to adversely affect them.

How do you foresee yourself being impacted by the tax reform?
Are there any particular items pertaining to fibromyalgia patients that you think I have overlooked?

Please let me know in the comments below.


Sources


https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/

https://www.vox.com/policy-and-politics/2017/12/15/16781062/read-republican-final-tax-bill

https://www.businessinsider.in/Republicans-are-releasing-the-official-text-of-their-final-tax-bill-heres-what-to-expect/articleshow/62089283.cms

https://www.washingtonpost.com/news/wonk/wp/2017/12/14/final-tax-plan-expected-to-keep-medical-deduction-and-grad-student-waiver-a-relief-to-millions/?tid=a_inl&utm_term=.11ad8749ca7a

https://www.vox.com/policy-and-politics/2017/12/19/16783634/gop-tax-plan-provisions

http://www.sacbee.com/news/politics-government/politics-columns-blogs/dan-walters/article37733694.html

http://money.cnn.com/2017/12/20/news/economy/republican-tax-reform-everything-you-need-to-know/index.html

Primer on Tax Jargon

Let's say you're income from all your sources, including employment and financial accounts, is $ 100,000. This is also called as your gross income. The government, which cares a lot about you (not), will give you certain ways to reduce your income for the purposes of taxes (this is called as taxable income).

One of these ways is to allow you to exclude income from certain sources. For example, any income from investments such as municipal bond (don't worry if you do not know what a municipal bond is, just consider it as a form of investment) will be exempted. Let's assume that you had $ 5000 from an investment which is tax exempted. So your actual income for taxable purposes is $ 95,000.

Next, the government allows you reduce your income for any expenses that you may have incurred over the year. For example, for patients with chronic illnesses, this may be the medical expenses. Let's say you had $ 10,000 of these expenses. The government allows you to deduct $ 10,000 from your income after exemption of $95,000. Now you're income for the purposes of taxes is $95,000 - $10,000 = $ 85,000.

If you are with me so far, you would notice that both exemptions and deductions are reducing your income for the purposes of taxes i.e. your taxable income. Credits are a bit different and are explained below

With the taxable income of $85,000, you can find that the income tax rate that can be applied to your taxable income and calculate your taxes. Let's say that the rate is 10% (I wish it were that less in real life!) and therefore the taxes that you owe are 10% of $ 85,000 = $ 8500.

The government will further allow you to reduce your taxes  by providing credits. This can be in the form of child tax credit. Let's say you have $100 of child tax credit and you have 2 children. So your total credit would be $ 200.

The final taxes that you owe will be $ 8500-$ 200 = $ 8300.

Complex rules govern who can take an exemption, deduction or a credit and up to what amount. The US tax reform is an attempt to rewrite some of these rules to achieve the policy goals of the government.