Understanding the Increasingly Popular Itemized Deduction for Medical Expenses

Abstract

Itemized deduction for medical expenses has existed in one form or another for more than 60 years. One justification for this tax deduction is that it reduces the burden for taxpayers with catastrophic expenses. Currently it shields more out-of-pocket spending on health care from taxes than any other tax provision. Based on a repeated cross section from 1999 to 2005 and a 5-year panel of tax returns, we find that filers aged 65 years or older claim the deduction more often, deduct larger amounts, and do so more persistently than younger taxpayers. Augmenting tax data with information from the MEPS, we find that no more than 41% of all tax units with non—tax preferred medical expenditures exceeding 10% of income claimed the deduction in 2005. Even for those claiming the deduction, the average tax benefit of the deduction offsets less than 10% of medical expenditures.