CRS Report on History and Rationale of Medical Expense Deduction

                       CRS REPORT FOR CONGRESS

[1] The deductibility of health expenditures not covered by private health insurance originated in the Revenue Act of 1942. The primary purpose was to ameliorate the higher World War II taxes on individuals while maintaining a high level of public health. The deduction was changed from net income to adjusted gross income to simplify computation. The Revenue Act of 1948 increased the maximum limitation so as to equalize the treatment in common-law and community-property states.

[2] The Revenue Act of 1951 removed the 5% threshold for taxpayers 65 or older in recognition that the elderly are frequently faced with lower earnings and higher medical expenses. In the 1954 recodification, the threshold was lowered, a separate floor was imposed on drug expenditures, and the maximum deductible amount was increased. These changes were made because Congress felt that the threshold and maximum limitation prevented the deduction of "extraordinary" medical expense.

[3] The maximum deduction was increased only for elderly taxpayers by the Technical Amendments Act of 1958. In 1960, medical expenditures for the care of aged dependent parents were no longer subjected to the threshold, equalizing the tax treatment of medical expenditures for those age 65 or older.

[4] The maximum amounts were doubled in 1962 in recognition of the hardships large medical expenses placed upon taxpayers. The Revenue Act of 1964 eliminated the separate 1% drug limitation for those age 65 or older. This change removed all limits for medical expenses of the aged and provided simplification. Shortly after this change, the special provisions previously provided the aged were all repealed by the Social Security Amendments of 1965, due to the passage of the Medicare.

[5] The Tax Equity and Fiscal Responsibility Act of 1982 raised the floor, repealed the separate deduction for health insurance premiums, and removed the separate limit for drug expenditures. Some felt the deduction no longer reflected a specific economic hardship. The Deficit Reduction Act of 1984 made clear that either parent may claim a deduction for medical expenses for a child. This law also provided for deduction of lodging expenses while away from home for medical care.

[6] The Tax Reform Act of 1986 lowered tax rates and broadened the tax base. One base adjustment increased the floor for medical expenses. The change allowed deductions only when a substantial portion of income is consumed by medical expenditures and reduced complexity by reducing the number of returns claiming the deduction. Deductibility was further restricted with passage of the Revenue Reconciliation Act of 1990, which prohibited use of the deduction for cosmetic surgery.

[7] Health care expenditures were again addressed with passage of the Health Insurance Portability and Accountability Act of l996. The act allows long-term care expenses to assist the disabled and the premiums for insurance against such expenses to be included in deductible medical expenses.

                               CONTENTS

[8] This report traces the legislative history of the deduction allowed for medical expenses since its inception as part of the Internal Revenue Code. This history shows that the deduction for all taxpayers has always been restricted to expenses in excess of a percentage of income (the floor) and, until 1967, was subject to a dollar ceiling. The floor greatly reduces the revenue cost of the deduction. The history reveals that at one time an exception to the floor existed for taxpayers 65 or older. Under the Revenue Act of 1951, the floor was eliminated for those 65 or older, with a later extension to taxpayers who bore medical costs associated with their elderly parents. These special exceptions to the floor were repealed with the adoption of the Medicare program as part of the Social Security Amendments of 1965. Later efforts to restore the full deductibility of medical expenses for elderly taxpayers have met with opposition because of the large associated revenue losses.

[9] Early history shows that the medical expense deduction was capped until 1966. In more recent years, the floor was first increased from 3% to 5% by the Tax Equity and Fiscal Responsibility Act of 1982. It was with passage of the Tax Reform Act of 1986 that the floor was raised to its highest level ever -- 7.5% -- where it stands today.

[10] Two primary concerns of Congress are the large number of Americans without health insurance coverage and the costs borne by the elderly for prescription drugs. These concerns have led to interest in tax-based policies to increase the number of citizens covered by health insurance and to help the elderly reduce their out- of-pocket costs of prescription drugs. Over the last few years, numerous tax proposals have been introduced in Congress. Among the most popular have been 1) providing an above-the-line deduction for health insurance/prescription drug coverage, 2) using tax credits (proposals have suggested both nonrefundable or refundable), 3) and the removal of the existing 7.5% floor of the taxpayer's adjusted gross income. ¹

[11] Both health insurance and prescription drugs are already eligible to be deducted as medical expenses. However, in actuality few taxpayers can reduce their taxable income through the existing deduction. Many families owe no income tax, and the deduction is of no benefit to them. Further, since most taxpayers use the standard deduction and do not itemize, most taxpayers fail to qualify for the deduction since the deduction is only available to those who itemize on their tax returns. ² Higher-income taxpayers are more likely to itemize than lower-income taxpayers. ³ Further, of the group that does itemize, few benefit from the medical expense deduction because unreimbursed medical expenses are unlikely to exceed 7.5% of adjusted gross income. ⁴ Those taxpayers who have medical insurance generally receive reimbursements for a portion of their medical expenses making it less likely that the taxpayer will pay for a large portion of the medical costs from his own pocket. Thus, the increase in the floor (to 7.5% of AGI) has led to the medical expense deduction being used primarily by those taxpayers who have large unreimburseable medical expenses relative to their income. Unlike the deductions for charitable contributions and casualty losses, the medical expense deduction cannot be carried forward to future tax years. The inability of most taxpayers to claim the medical expense deduction makes it a negligible factor in the decision to buy health insurance.

[12] If we view the medical expense deduction as it has been seen traditionally as a means of making sure that taxpayers faced with large medical expenses are not subject to income taxes on amounts used to pay those expenses-then the current itemized deduction fulfills its role. Tax deductions perform a legitimate function when the objective is to define income that should be taxable. However, if the deduction is to be viewed as a means of providing relief and aid either to purchase insurance or pay for prescription drugs through the tax structure, then the form appears to be inappropriate. This is because the value of a deduction depends upon the marginal tax bracket of the taxpayer and provides the greatest tax relief to higher-income individuals since they are subject to higher tax rates.

[13] The complete history of the medical expense deduction follows. Other health-related provisions enacted within those same bills are also discussed so as to provide an overview of congressional thinking of the time.

REVENUE ACT OF 1942

[14] The individual income tax deduction available for medical and dental expenses was first introduced into the tax code by the Revenue Act of 1942 (P.L. 77-753). That law provided a deduction for unreimbursed medical expenses of the taxpayer, the taxpayer's spouse, children, or dependents. In order to be deductible, expenses had to exceed 5% of net income (net income was defined as gross income less the deductions allowed individuals). The maximum deduction allowed was $2,500 for married taxpayers filing jointly and for those filing as head of household. In the case of single taxpayers, the maximum deduction was limited to $1,250. From the very beginning, medical insurance premiums were includable as a medical expense.

[15] The medical expense deduction was among the tax changes that resulted from revenue needs brought about by World War II. Included in the Revenue Act of 1942 were an increase in income tax rates and a reduction of the amount allowed as a personal exemption. This had the effect of adding lower-income persons to the tax rolls and increasing the tax liabilities of those previously subject to taxes. The personal exemption was viewed as providing a safeguard from taxation for individuals at low-income levels. In effect, it acted to exempt such basic living costs as rent, food, clothing, and necessities like medical care. Thus, because of the reduction in the personal exemption, Congress concluded that a deduction should be provided for essential medical services to keep individuals from postponing health expenditures. As such, the medical expense deduction stands as an exception to the general rule that personal expenses should not be deductible.

[16] In hearings held before the House Ways and Means Committee, the Tax Adviser to the Secretary of the Treasury, Randolph E. Paul, testified that "a deduction should be allowed for extraordinary medical expenses that are in excess of a specified percentage of the family's net income. The amount allowed under such a deduction should, however, be limited to some specified maximum amount." ⁵ Mr. Paul was asked if it would be difficult to define extraordinary medical expenditures. He responded that it is necessary to "think of the revenue as well as the considerations of equity, and we do not want to open the door to a deduction for the ordinary medical expenses which go along in ordinary course in the average family. But we do think there should be some allowance, and we think of the allowance in terms of medical expenses in excess of 5% of the income, but not to exceed $2,500. ⁶ The Senate Committee on Finance noted in its recommendation for allowance of the deduction "in consideration of the heavy tax burden that must be borne by individuals during the existing emergency, ⁷ and of the desirability of maintaining the present high level of public health and morale." ⁸ The report went on to note that the term "medical care" was to be broadly defined and included amounts paid for drugs or medicines as well as for accident and health insurance. The purpose of the 5% floor was to restrict medical expense deductions to those which are large in relation to a taxpayer's income. In addition, the floor and ceiling reduced the revenue loss associated with the deduction.

INDIVIDUAL INCOME TAX BILL OF 1944

[17] The Individual Income Tax Bill of 1944 (P.L. 78-315) created the new concept of "adjusted gross income." In general, the act defined adjusted gross income to mean gross income less business deductions. In addition, the act provided that medical expenses were deductible to the extent that they exceeded 5% of adjusted gross income (in lieu of prior law's provision that the 5% floor was computed upon net income). The House and Senate reports noted that the change from net income to adjusted gross income was expected to result in a slight reduction in the medical expense allowance claimed. However, Congress believed the change was justified in the interest of simplification.

REVENUE ACT OF 1948

[18] Under provisions of the Revenue Act of 1948 (P.L. 80-471), the 5% floor was not changed, but the maximum deduction was increased. Under the change, the personal exemption amount of $1,250 was multiplied by the number of exemptions (excluding the additional exemptions allowed for those who were age 65 or older and those who were blind) with a maximum medical expense deduction of $2,500. In addition, a new maximum of $5,000 was established for those filing a joint return. The House report noted:

     If both parties to a marriage in a community-property State file

REVENUE ACT OF 1951

[19] The Revenue Act of 1951 (P.L. 82-183) removed the 5% limitation for unreimbursed medical expenses paid during the year if the taxpayer or spouse was age 65 or over, but only with respect to the medical expenses of the elderly taxpayer and/or spouse. The act did not affect the maximum deduction for other taxpayers. The provision became effective beginning in 1951. This change resulted from the adoption of a Senate provision without a corresponding provision appearing in the House bill. The Committee on Finance found that:

     "Persons in that age bracket have generally reached a period of

INTERNAL REVENUE CODE OF 1954

[20] Under the comprehensive revision of the 1954 Internal Revenue Code (P.L. 83-591),the deduction for medical and dental expenses under went major change. The threshold for deductibility was lowered from 5% to 3% of the taxpayer's adjusted gross income; expenditures for drugs and medicines would continue to be included as a medical expense, but only to the extent that they exceeded a separate 1% floor of the taxpayer's adjusted gross income (this applied to those over and under age 65); and the maximum amount allowed as a medical deduction was raised from $1,250 to $2,500 per exemption (again, not including the additional exemptions permitted for taxpayers age 65 or older or for those who are blind). In addition, the law provided a maximum deduction for medical expenses of $5,000 in the case of a taxpayer who was single or a taxpayer who was married but filed a separate return. The maximum deduction allowed was $10,000 in the case of a taxpayer filing a joint return with his/her spouse, a taxpayer who was a head-of-household or a taxpayer who was a surviving spouse.

[21] Added to the code in 1954 was the allowance of deductible medical expenses on the final return of a decedent even if those expenses were paid after death. Further, the law defined "medical expenses" and included a deduction for transportation expenses for medical care (but not for ordinary living expenses associated with the trip). The House Ways and Means Committee explained these changes in its report:

          Several problems have been raised in connection with the

[22] An increase in the maximum deduction for expenses paid for medical care was provided under the Technical Amendments Act of 1958 (P.L. 85-866). The change was provided under a Senate amendment to which the House receded with a clerical amendment. The amendment provided an increase in the maximum medical deduction to $15,000 for a taxpayer or his spouse who attained the age of 65 before the close of the taxable year and was also disabled. If both spouses were 65 or over and both were disabled, the maximum could be $30,000 in the case of a joint return. The increased limits applied only to taxpayers who were 65 and disabled and/or for a spouse who was 65 and disabled. The prior law limitations applied to taxpayers not able to meet these dual requirements. This limitation applied to taxable years which began after 1957. The Senate amendment defined disabled as those unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. The rationale provided by the Senate Committee on Finance was the committee's belief that the maximum amounts should be increased where the taxpayer or his spouse is disabled and has reached age 65 before the close of the taxable year.

PROCEDURE FOR ASSESSING CERTAIN ADDITIONS TO TAX

[23] With passage on May 14, 1960, of the Procedure for Assessing Certain Additions to Tax (P. L. 86-470) the 3% limitation was repealed for medical expenses when incurred for the care of the taxpayer's dependent parents (if they were age 65 or older) or the dependent parents of the taxpayer's spouse. The amendment applied to taxable years which began after December 31, 1959. ¹³ No rationale was provided in the legislative committee reports of the time.

INCOME TAXES-DEDUCTIONS, ETC.

[24] In 1962, Congress passed a law entitled Income Taxes- Deductions, Etc. (P.L. 87-863) which doubled the medical expense deduction ceilings. The maximum medical expense deduction by a single person was increased from $5,000 to $10,000, with a married couple provided an increase from $10,000 to $20,000. The maximum amount allowable for each exemption was increased from $2,500 to $5,000. In the case of those 65 or over and who are disabled, the ceiling was increased from $15,000 to $20,000. In the case of an elderly couple both of whom were 65 or older and disabled, the maximum amount was increased from $30,000 to $40,000. The rationale for increasing the ceilings was that hardship cases had been found where individuals had very large medical expenses. The Senate report stated:

          Under present law, the ceiling on medical expense

[26] Also included in this act was a provision which allowed an employer to provide for the payment of benefits for sickness, accident, hospitalization, and medical expenses of retired employees and their spouses and dependents through a qualified pension plan rather than under a separate plan. The Senate report noted:

          A number of employers have provided, under their sickness

          It is apparent, therefore, that present law already grants

[28] The Revenue Act of 1964 (P.L. 88-272) eliminated the 1% limitation on medicine and drug expenses for a taxpayer or the taxpayer's spouse when 65 years or older. The elimination of the separate 1% drug limitation was also made to apply for drug costs paid on behalf of a dependent parent who was 65 years or older. This conformed the tax treatment with respect to the 1% limitation for drugs with that provided in the case of the 3% limitation for medical expenses. The following explanation for the change has been taken from the report issued by the Senate Committee on Finance:

     The House bill repeals the 1-percent limitation with respect to

[29] The Social Security Amendments of 1965 (P.L. 89-97) repealed the special provisions for taxpayers 65 years or over for tax years after 1966. The reasoning at that time was that the health insurance provisions of the Medicare legislation would relieve older people from the heavy financial burden associated with medical expenses.

[30] In addition to repealing the special provisions for taxpayers 65 years and over, the act provided that 50% of the cost for health insurance (not to exceed $150) could be deducted without regard to the 3% limitation. The underlying reasoning behind the allowance of a deduction for health insurance expenditures was that wealthy individuals could self-insure against large health care expenditures and, thus, benefit from the use of the medical expense deduction. However, taxpayers who could not afford to self-insure and who felt the need to protect themselves against the risk of major financial loss because of injury or illness by purchasing health insurance would generally not receive tax benefits from the medical expense deduction since health insurance reimbursements would preclude their use of the deduction.

[31] The separate 1% limitation on drugs and medicine was left unchanged. The remaining costs associated with health insurance and pharmaceutical purchases could be included with other medical expenses, subject to the 3% adjusted gross income limitation of the deduction. For the first time, this act removed the dollar ceiling on the medical expense deduction. ¹⁹ These changes were effective for tax years after 1966. A lengthy explanation of the provision to eliminate the special medical and drug expense deduction for the aged appeared in the House Ways and Means report:

          The health care provisions of your committee's bill have a

[32] Three major changes were made to the medical expense deduction under the Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248). First, the floor for deductible medical expenditures was raised from 3% to 5% of adjusted gross income. Second, the separate deduction for one-half of health insurance premiums (capped at $150) was repealed. Expenditures made for medical insurance premiums could be included in medical expenses subject to the 5% floor. Third, the separate 1% limitation for drug expenditures was eliminated. In the future, only expenditures for drugs which legally require a prescription or insulin were permitted to be included in the medical expense deduction. The change made to the deduction for health insurance premiums and the increase in the medical expense deduction floor were effective beginning in 1983. The change for drug expenditures was made effective for taxable years beginning in 1984.

[33] The primary rationale for these changes revolved around a concern that the deduction was providing broad coverage of expenses no longer reflecting economic hardship and a concern that the deduction could create an incentive for additional medical expenditures exacerbating the rise in medical care costs. It was reported:

          The primary rationale for allowing an itemized deduction

[34] There were two changes made to the medical expense deduction under the Deficit Reduction Act of 1984 (DRA84) (P.L. 98- 369). Congress grew concerned over the court costs and administrative efforts required of the Internal Revenue Service to resolve disputes between parents when they divorced and both claimed the personal exemption of their child. DRA84 included a change in the law that provides the exemption of a dependent child to the divorced parent who has custody for the greater part of the year. The law also included a provision to make clear that either parent may claim a deduction for medical expenses, and that either parent may exclude from income qualifying employer reimbursements for medical expenses.

[35] The second change in the law provided for a deduction for lodging expenses while away from home for medical care. DRA84 provided that such expenses not be lavish or extravagant and that the lodging expenses of an eligible person (such as a parent with a child) who accompanied the individual seeking medical care may also be included as a medical expenditure.

TAX REFORM ACT OF 1986

[36] Under the Tax Reform Act of 1986 (P.L. 99-514), tax rates were lowered and the tax base was broadened. One adjustment made to the tax base was an increase in the floor before medical expenses can be claimed as a deduction. The floor was raised from 5% to 7.5%. The rationale for increasing the floor was provided by the staff of the Joint Committee on Taxation.

          In raising the deduction floor to 7.5 percent of the

REVENUE RECONCILIATION ACT OF 1990

[38] As part of the Revenue Reconciliation Act of 1990 (P.L. 101-508), deductions for cosmetic surgery were eliminated since it was felt that cosmetic surgery, like other day-to-day expenditures of living ( i.e., food, clothing, etc.), generally should not be deductible in measuring taxable income. It was also the belief of many in Congress that disallowing this expense would not only raise needed federal revenues but would also reduce the number of returns claiming the medical expense deduction, thus alleviating the complexity associated with the deduction, including substantiation and audit verification problems.

[39] Under a Senate amendment "cosmetic surgery or other similar procedures are not deductible medical expenses, unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring injury resulting from an accident or trauma, or disfiguring disease." In addition, the conference agreement provided that since deductions were no longer to be allowed for cosmetic surgery, "amounts paid for insurance coverage for such expenses were not deductible under section 213 and reimbursement for such expenses was not excludable from the gross income of an individual under a health plan provided by an employer (including under a flexible spending arrangement)."

[40] The act also provided a limitation on itemized deductions for high income taxpayers. However, deductions for medical expenses were excluded from this limitation.

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996

[41] A significant reform of the nation's health insurance system was signed into law in late 1996. The Health Insurance Portability and Accountability Act of 1996 (P.L. 104-91) contained a number of provisions affecting the tax treatment of health care expenses. The act included provisions designed to give long-term care expenses the same favorable tax treatment that medical expenses have enjoyed. Under the act, long-term care expenses to assist the disabled with activities of daily living, and the costs of insurance premiums for insurance against such expenses are permitted to be included in medical expenses. Further, the act provided an exclusion of employer-paid long term care insurance from taxable income and allowed the self-employed to deduct long-term care policy premiums. The act increased the health insurance deduction for the self- employed from 30% of health insurance premiums to 40% for 1997, 45% for 1998 through 2002, and by another 10 percentage points each year thereafter until it reaches its permanent level of 80% in the year 2006. ²⁷ A pilot program was established for medical savings accounts (MSAs) which has since been extended. ²⁸ The act allowed for penalty-free withdrawal of amounts from individual retirement accounts to pay medical expenses in excess of the 7.5% adjusted gross income floor, as was already allowed for employer-sponsored retirement plans. Unemployed persons were permitted to take IRA distributions penalty-free when amounts were used to pay health insurance premiums. Finally, the act made state-sponsored organizations insuring or reinsuring high-risk individuals or workers compensation funds tax-exempt and provided some organizations similar to Blue Cross/Blue Shield plans the same partial tax exemption given to those plans in the Tax Reform Act of 1986.

² For tax year 1997, a total of 122.4 million returns were filed. Those that itemized on their income tax returns represented approximately 30% (36.6 million).

³ Higher-income taxpayers are more likely to own a home and have deductions for interest on a home mortgage and be eligible for a deduction for property taxes. Higher-income taxpayers are also more likely to pay a larger amount of state income tax which is also deductible.

⁴ Of the 36.6 million returns that itemized in 1997, 5.3 million (14%) claimed a deduction for medical expenses.

⁵ U.S. Congress, House Committee on Ways and Means, Revenue Revision of 1942, hearings on Revenue Revision of 1942, volume 2,77th Cong., 2 nd sess., March 25, 26, 27, 30, 31, April 1, 2, 3, 7, 8, and 9, 1942 (Washington: GPO, 1942), p. 1612.

⁶ Ibid. p. 1613

⁷ World War II

⁸ U.S. Congress, Senate Committee on Finance, The Revenue Bill of 1942, To accompany H.R. 7378, 77th Cong., 2 d sess., S. Rept. 1631 (Washington: GPO, 1942), p. 6.

⁹ U.S. Congress, House Committee on Ways and Means, Revenue Act of 1948, To accompany H.R. 4790, 80th Cong., 2nd sess., H. Rept. 1274 (Washington: GPO, 1948), p. 24.

¹⁰ Ibid.

¹¹ U.S. Congress, Senate Committee on Finance, The Revenue Act of 1951, to accompany H.R. 4473, a bill to provide revenue, and for other purposes, 82nd Cong., 1st sess., S. Rept. 781 (Washington: GPO, 1951), p. 51.

¹² U.S. Congress, House Committee on Ways and Means, Internal Revenue Code of 1954, to accompany H.R. 8300 a bill to revise the Internal Revenue Laws of the United States, 83rd Cong., 2nd sess., H. Rept. 1337 (Washington: GPO, 1954), p. 30.

¹³ The provision was added by the Senate Finance Committee and under the committee's version would have applied to "a dependent individual who stands in loco parentis to the taxpayer or his spouse. The conference agreement provided no change in the law in the case of an individual who stands in loco parentis to the taxpayer or his spouse.

¹⁴ U.S. Congress, Senate Committee on Finance, Maximum Limitations on Deduction For Medical Expenses, to accompany H.R. 10620, 87th Cong., 2nd sess., S. Rept. 2274 (Washington: GPO, 1962), p 2.

¹⁵ Ibid. p. 3.

¹⁶ U.S. Congress, Senate Committee on Finance, Inclusion of Medical, Etc., Benefits Under Qualified Pension Plans, to accompany H.R. 10117, 87th Cong., 2nd sess., S. Rept. 2266 (Washington: GPO, 1962), p. 2.

¹⁷ Ibid. p. 4.

¹⁸ U.S. Congress, Senate Committee on Finance, Revenue Act of 1964, to accompany H.R. 8363, 88th Cong., 2nd sess., S. Rept. 830 (Washington: GPO, 1964) p. 67.

¹⁹ The House conferees accepted a Senate amendment to remove the ceiling on medical expense deductions. The conference report noted that while generally desirable, it may raise problems with amounts claimed as medical expense deductions for facilities, devices, services, and transportation which are of the types customarily used, or taken, primarily for other than medical purposes.

²⁰ U.S. Congress, House Committee on Ways and Means, Social Security Amendments of 1965, report on H.R. 6675, 89th Cong., 1st sess., H. Rept. 213 (Washington: GPO, 1965), pp. 136-137.

²¹ U.S. Congress. Joint Committee Print. General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (H.R. 4961, 97th Congress; Public Law 97-248) 97th Congress, 2nd sess. (Washington: GPO 1983), pp. 24-25.

²² U.S. Congress. Joint Committee Print. General Explanation of the Tax Reform Act of 1986 (H.R. 3838, 99th Congress; Public Law 99-514) 100th Cong., 1st. sess. (Washington: GPO, 1987), pp. 50-51.

²³ Specifically mentioned were expenses for constructing entrance or exit ramps, widening doorways at entrances or exits as well as adjustments to hallways and interior doorways to accommodate wheelchairs, the installation of railings, support bars or other bathroom modifications, lowering of kitchen cabinets, or other modifications and adjustments made to electrical outlets and fixtures.

²⁴ The provision also applied to the taxpayer's spouse or dependent.

²⁵ U.S. Congress. Joint Committee Print. General Explanation of the Tax Reform Act of 1986 (H.R. 3838, 99th Congress; Public Law 99-514) 100th Cong., 1st sess. (Washington: GPO, 1987), pp. 51-52.

²⁶ Ibid. p. 51.

²⁷ Further information on this subject can be found in Tax Treatment of Health Insurance Expenditures by the Self-Employed: Current Law and Selected Economic Effects, CRS Report 98-515 E, by Gary Guenther.

²⁸ The program allows self-employed persons and employees of small employers who are covered by a high-deductible health insurance policy to deduct or exclude contributions to a special savings account set up as a trust to pay medical expenses. Distributions from the account are not taxed when used to pay for medical expenses. Any other distribution is included in the taxable income of the taxpayer in the year made. The limit on deductible or excludable contributions is equal to 65% (for individual coverage) or 75% (for family coverage) of the amount of the policies' deductibles, which can be up to $2,250 for individual taxpayers or $4,500 in the case of families. While the legislation provided a cap on the number of MSAs established, far fewer accounts have been opened than were permitted under law.