How Tax Reform hurts People on Medicaid

Posted on: November 21st, 2017 by Mark R. Friedman

Not to get political here, but…

I’ve been following President Trump and Republicans’ proposed tax reform with interest.  If you’re also interested, you can read all about it elsewhere, including  how it affects the estate tax, state and local tax deductions for people in high-tax states like New Jersey, etc.  But there’s one provision that should be of particular concern to our clients – the medical expenses deduction.

The tax reform bill eliminates the deduction for medical expenses.  That’s a big deal for people in nursing homes, especially people in nursing homes on Medicaid with relatively high incomes.

That is because once you go on Medicaid, your income must be spent according to Medicaid rules.  When you apply for Medicaid, the agency gives you a breakdown at the end that shows how you have to spend your income each month.  For people without a spouse, usually all of your income must go to pay the nursing home or assisted living facility, with perhaps a small amount allowed to pay for health insurance.

There is no allowance to pay for taxes.

Usually that’s not an issue, because Medicaid beneficiaries typically have low income.  And if their income is not low, usually their medical expenses (which are almost all of their income) are high enough that the medical expense deduction is high enough to result in no tax.

But if the medical expense deduction goes away, people in nursing homes with high incomes may end up owing tax.  In that case, they would be in a very difficult situation.  They would owe money to the IRS, but also owe money to the nursing home.  They would have to decide whether to follow tax law, or Medicaid rules.  Either way, they could end up with obligations that they cannot pay.

I hope that lawmakers will take this into account as tax reform progresses.

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