I’m reminded of one of my favorite television shows when I think of the cost of health care in retirement. Jeopardy began in 1964 and the idea has always been to answer a question in the form of a question. So today’s question goes like this: What is the amount of deductions that Americans failed to take advantage of in the year 2011? The answer: What is $100 billion dollars Alex, (referring to host Alex Trebek.)
$100 Billion
But how much is $100 billion really?
Well $100 billion is:
- The total research and development budget for the U.S. military in 2011, with almost enough left over to fund the medical care of the entire military.
- Enough to fully fund the department of agriculture and have $75 billion left over!
- Almost enough to fund the majority of the discretionary expenditures of the Department of Health and Human Services.
- More than enough money to fund NASA five times over.
Again, $100 Billion simply because US citizens failed to take basic deductions and what is worse?
Assuming the same percentages going forward this lost opportunity will grow from $100 billion in 2011 to over $134 billion by 2017.
Why?
The affordable care act of 2010 added a new level of taxation on individuals and retirees. For individuals there was an increase in the floor for taking medical expense deductions from 7.5% to 10%. Retirees will see the number increase to 10% beginning in 2017.
What does this mean?
Given that roughly 32% of income tax filers in 2011 itemized their deductions (38% for 65 plus) it means that most people are not taking advantage of deducting their medical expenses both while working and in retirement. For those that do itemize they lose the ability to deduct the first 7.5% of their expenses.
The Tax Facts
In 2011 there were 145.3 million tax returns filed in the U.S., of those 21.6 million were filed by persons over the age of 65. 8.1 million 65 year olds itemized their deductions while 12.8 million took the standard deduction. 6.4 million were taxed on their social security income and 4.8 million itemized medical expenses. Only 22% of filers over the age of 65 were able to utilize the medical expense deduction. The total amount claimed was $72.6 billion and the amount in excess of the 7.5% floor was roughly $20 billion. Total income for those over age 65 was $1.343 trillion which means the current floor of 7.5% equals $100 billion. Because of the floor American’s are missing out on billions of dollars in deductions on an annual basis.
How this affects the average American
According to 2011 data from the bureau of labor statistics, the average out of pocket health care expenditure was $5,028 for person 65 and older. If you add in Part B at $104.90 per month this totals $6287 annually spent on healthcare. Assuming a 20% tax bracket the lost income is $1257 a year, enough to pay the average cost of both out of pocket medical services and supplies! In a 30% bracket this totals $1886 or enough to pay out of pocket medical services and supplies along with prescription drug costs.
To put this in context, the average mortgage deduction taken by Americans over the age of 65 in 2011, according to the U.S. Census Bureau, Current Population Survey, 2012 Annual Social and Economic Supplement was $8712. Average medical expenses then are 72% of the average home mortgage deduction.
Would you advisor or Accountant let you miss out on taking the home mortgage deduction?
The problem will get worse.
Medicare premiums have increased at just under 8% since its inception in 1965. If this pace continues in the future the average Medicare Part B premium will increase from $104.90 a month today to over $475 a month in 20 years.
In addition various means testing proposals put forth in the 2014 budget and by other advocacy groups would further increase the means testing costs for those Americans with higher incomes in retirement. In fact, the goal is to increase means testing until 25% of retirees pay an additional cost above the basic premium today of $104.90 a month.
So what can a person do to take advantage of this deduction in retirement?
Review the options provided to you by your employer, Voluntary employee benefit associations (VEBA), health savings accounts, 401(h) accounts. Roth 401(k), Roth 403b, Individual Roth accounts, Permanent Life Insurance and Immediate annuities all have some of the most favorable features with which to fund health care costs in retirement.
And don’t forget Long Term Care policies that pay out tax-free benefits in the event of a long term care need!
For assistance in calculating your projected health care costs in retirement visit: www.yourretirementcosts.org
