cover image: The Distributional Implications of Itemized Medical Deductions

The Distributional Implications of Itemized Medical Deductions

14 Nov 2024

Approximately $76 billion in out-of-pocket medical spending was deducted as an itemized medical deduction (IMD) in 2021, resulting in about $9 billion in federal forgone tax revenue. We use data from U.S. tax returns to examine how these tax savings are distributed across income and age, how the distributions differ from the mortgage interest deduction, and how the distributions changed with the 2017 Tax Cuts and Jobs Act. While a given level of medical spending is less likely to be above the income threshold for higher-income households, itemization rates and marginal tax rates increase with income, resulting in tax savings skewed towards higher-income taxpayers: 94 percent of the tax savings accrue to those in the top half of the income distribution. The tax savings are also highly concentrated at older ages, with 42 percent accruing to those over age 65. Using rich survey data on out-of-pocket medical spending, we illustrate how the distribution of tax savings varies across policy alternatives. We find that expanding eligibility for the tax subsidy would likely reduce the concentration of tax savings at higher incomes and increase the concentration of tax benefits at older ages.
taxation public economics health, education, and welfare economics of aging economics of health

Authors

Gopi Shah Goda, Ithai Lurie, Priyanka S. Parikh, Chelsea Swete

Acknowledgements & Disclosure
This research was conducted while the author was an employee at the U.S. Department of the Treasury. The findings, interpretations, errors, and conclusions expressed in this paper are entirely those of the author and do not necessarily reflect the views or the official positions of the U.S. Department of the Treasury or the Office of Tax Analysis. Any taxpayer data used in this research was kept in a secured Treasury or IRS data repository, and all results have been reviewed to ensure that no confidential information is disclosed. We would like to thank David Brown, Adam Cole, Catherine Crato, Philippa Haven, Alice Heath, Eda Herzog-Vitto, Kye Lippold, Ben Meiselman, Robert Moffitt and David Splinter for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
DOI
https://doi.org/10.3386/w33157
Pages
37
Published in
United States of America

Table of Contents

Related Topics

All