The itemized medical deduction (IMD) allows taxpayers to deduct certain out-of-pocket medical expenses from their taxable income. This provision was established by the Revenue Act of 1942 to cushion lower-income families from the tax burden of extraordinary medical expenses. Initially, the IMD was intended to provide tax relief to those with high medical costs, but its design and interaction with other tax code features have limited its effectiveness. Only a small fraction of those with high medical costs benefit from the IMD due to significant barriers to claiming the deduction, resulting in unclaimed tax savings.
The IMD has remained largely intact through decades of changes in government health care subsidies, including the introduction of Medicare and Medicaid in 1965 and the Affordable Care Act (ACA) in 2014. In 2022, taxpayers deducted $92.9 billion in IMDs, representing nearly one-fifth of total out-of-pocket medical spending and resulting in an estimated $9.5-12.3 billion in forgone federal tax revenue. The IMD is particularly significant for those aged 65 and older, who claimed approximately $62 billion, or two-thirds of total IMDs, in 2022.
The IMD allows deductions for various medical expenses, including payments to doctors, dentists, hospital care, prescription drugs, medical equipment, insurance premiums, transportation costs, home modifications for disabilities, and long-term care services. However, only medical expenses exceeding 7.5% of the taxpayer’s Adjusted Gross Income (AGI) are deductible. Taxpayers must choose to itemize their deductions, which include medical expenses, mortgage interest, state and local taxes, and charitable donations, to benefit from the IMD. The decision to itemize depends on whether the total of these items exceeds the standard deduction.
The tax savings from the IMD are distributed unevenly, with higher-income taxpayers benefiting more due to higher itemization rates and marginal tax rates. Approximately 94% of the tax savings accrue to the top half of the income distribution, and 41% to the top 10%. Claiming rates for the IMD increase with income and age, highlighting its importance for financing health care costs at older ages.
Limitaciones del IMD
The IMD falls short of its objective to provide relief to people with high out-of-pocket medical spending in several ways. Many with high medical costs are not eligible for tax relief due to the requirement to itemize deductions and have positive taxable income. Additionally, a substantial share of potential tax savings from the IMD are left unclaimed due to the complexity and hassle of the claiming process. The implied time and hassle costs of claiming the IMD are significant, reducing the net economic benefit for those who do claim it.
Recent policy changes, such as the Affordable Care Act (ACA) and the Tax Cuts and Jobs Act (TCJA), have affected the IMD. The ACA temporarily increased the AGI threshold for claiming the IMD from 7.5% to 10%, while the TCJA restored the 7.5% threshold and increased the standard deduction, reducing the number of taxpayers benefiting from itemizing. The One Big Beautiful Bill Act (OBBBA) of 2025 made several changes to itemized deductions, including a higher standard deduction and an increased cap on the State and Local Tax (SALT) deduction, which could result in more taxpayers claiming the IMD.
Recomendaciones para mejorar el IMD
Policymakers should consider the IMD as a policy lever relative to other potential policies, such as expanding public insurance programs or encouraging private insurance coverage. The high economic burden of claiming a medical subsidy through the tax code and its redistributive features suggest that replacing the IMD with more generous coverage for long-term services and supports could improve risk protection more efficiently.
To increase IMD claiming among those eligible, policymakers could reduce administrative burdens by requiring health care providers and insurers to track and report eligible amounts. Educational campaigns by tax preparers, health care providers, and the IRS could also increase awareness of the IMD. To expand eligibility among high medical spenders without dramatically increasing government costs, policymakers could increase the IMD income floor, remove the requirement to itemize, convert the subsidy to a refundable credit, or reduce the scope of allowable medical spending.
Conclusión
The IMD was created to mitigate the tax burden on those facing hardship from high health care costs. However, its benefits are concentrated among a small share of households with high medical costs, disproportionately those with more resources. Given the changes in the health insurance landscape and the government’s role in health care provision over the past 80 years, this policy should be revisited by policymakers to ensure it effectively addresses the financial risks of high medical costs.
