[A] recent tax law change has upset a small but vocal group of taxpayers in Vermont, and state lawmakers might see a bid to undo that change this year.
Before 2018, when taxpayers could deduct medical expenses that were more than 7.5 percent of their adjusted gross income, that deduction applied to the Vermont return as well.
But last year, adjusting to federal tax changes, Vermont lawmakers decided to alter that state deduction and many others, creating a class of taxpayers who did not qualify for the deductions anymore. Vermonters still receive the health expense deduction at the federal level.
Some of the Vermonters who qualified for the deduction in the past are learning from their tax preparers that they’ll be facing bigger bills this year because of the change. The issue got very little attention from the public when it was being discussed in the House Ways and Means Committee last year because it was overshadowed by other large changes to the state and federal tax code. Also, CPAs noted, the legislative session coincides with tax season, when they are not as available to monitor legislation or testify about proposed changes.
But CPAs have plenty to say about the change now that they are doing 2018 taxes. Jason Cadwell, a CPA in Shelburne, used as an example a couple where the wife could no longer care for the husband, who has dementia.
“He’s now in a cognitive care community to the tune of over $150,000 a year, and to add insult to injury, they have to draw out of retirement accounts in order to pay that,” Cadwell said. “That’s going to cost over $10,000 in taxes, and they’ll pay more in Vermont taxes than they are paying federal taxes. Explain to me how that makes sense?”
Jeffrey Dooley, the taxpayer advocate for the Vermont Department of Taxes, recommended amending the state income tax to include a deduction or credit for medical expenses in testimony last week to House Ways and Means.
“This is greatly increasing the taxable income and, therefore, Vermont income tax due for these individuals relative to prior to the statutory changes in 2018,” Dooley wrote in his testimony. “This is especially difficult for this population to absorb as medical expenses are generally an area that a taxpayer cannot plan for or reduce, without potentially putting their health at risk.”
The issue has gained a lot of attention among seniors, noted one retirement community resident who asked that he and the specific community not be identified because the issue has provoked ire among residents. The resident said advocates for restoring the deduction are treading carefully to avoid the impression that they are looking for a tax break for the wealthy.
“It affects a lot of people in a lot of different ways,” the resident said. “There’s a perception that this is kind of an elite group or upper crust, but a lot of us aren’t. I’m on a very uneven income; most of us have sold our houses to be able to get here.”
Cadwell concurred.
“It’s not just the wealthy,” he said. “The situations I am dealing with, it’s people trying to make their resources last until their last breath, or they’re in situations where there is a child in an inpatient program that the family has had to dip into their resources to cover that, and it’s going to mean an impact on their long-term security.”
Kaj Samsom, the state’s tax commissioner, said he plans to meet with Rep. Kate Webb, D-Shelburne, because her constituents have contacted her about the issue, “and she said she was interested in pursuing the issue,” he said. He said allowing the deduction again would cost the state about $5 million.
Tax preparers have brought up the matter in their regular forums with tax department officials, Samsom said.
“It’s not uncommon for a litany of issues to come up and this has consistently come up at our advisory groups and at presentations that we do with the tax preparer community,” Samsom said.
But “without a doubt, people with moderate to higher income with moderate to high medical expenses … they are kind of losing a significant tax deduction,” he said.
Removing the deduction is the kind of tax policy that encourages seniors to leave the state, said the retirement home resident.
“The seniors, of course, are the ones who really have the highest medical expenses in general,” the resident said. “People are looking at the states that have the lower taxes. Vermont is going to continue to lose those people who view this as a high tax state when they have alternatives, and that’s the group that can pay the taxes.”
The health expense deduction only affected 6,685 people in Vermont in 2018, Samsom said.
“Within that group, many may actually be better off tax wise because of other components of the tax reform package, such as the new Social Security exemption,” he said. “The actual number of folks impacted negatively in total would be much lower than the 6,000.” Samsom noted Vermont has 370,000 taxpayers.
At least last year, the health expense deduction was far from the largest issue on the minds of taxpayers. According to the state taxpayer advocate’s report, that issue was property tax adjustments, the subject of most of the 1,000 phone calls the office received in the year leading up to Dec. 1, 2018.
Other major itemized deductions that were removed were charitable contributions, mortgage interest, property taxes, and state and local income taxes.
“All of those populations lost the ability to deduct something, and in return, to balance things out, because it was a revenue-neutral tax reform, they preserved the federal exemption and they got .2 percent lower rates throughout all the brackets in Vermont,” Samsom said.
Cadwell said he’d like to see the law changed to allow Vermont taxpayers to deduct the medical expenses as shown on the federal return to the extent that they exceed their Vermont standard deduction, which is $12,000 for a married couple.
Rep. Janet Ancel, D-Calais and the head of House Ways and Means, said the deduction can’t be removed without a look at the state’s overall tax structure, and she hasn’t made any decision about whether to do that. She added that she’s not surprised people are discovering their tax liabilities have changed.
“There was a lot going on both with federal income tax and state income last year,” she said.
