February 17, 2005
TAX INCENTIVES TO PURCHASE HEALTH INSURANCE
By: Janet L. Kaminski, Associate Legislative Attorney
You asked what tax incentives other states offer to encourage individuals and employers to purchase health care insurance.
Seven states offer tax incentives designed to encourage the purchase of health care insurance. Three (Colorado, Idaho, and Oklahoma) provide a tax credit in certain situations. Three (Kentucky, Michigan, and Pennsylvania) exclude certain insurance premiums from income for tax purposes. South Carolina allows a deduction from taxable income for premiums. Additionally, Oregon allows a tax credit for the purchase of long-term care insurance. Copies of the state tax laws are enclosed.
Under the federal Trade Adjustment Act of 2002, the federal government provides a 65% tax credit that eligible individuals can apply toward health care coverage, including COBRA continuation coverage, insurance from a state high-risk pool, and certain plans offered by commercial insurers. The credit is available to individuals (1) who have lost their jobs due to foreign competition and (2) age 55 through 64 receiving benefits from the Pension Benefit Guaranty Corporation due to a federal takeover of their former employer's pension plan.
An individual may claim a credit against personal income tax for expenses incurred for private health insurance for himself, his spouse, or dependents if (1) they were not covered by an individual or group health benefit plan at any time during the tax year preceding the tax year for which the credit is being claimed or (2) he was eligible to claim the credit the prior year. The credit is limited to taxpayers whose adjusted gross income for the calendar year preceding the tax year for which the credit is claimed does not exceed (1) $25,000 for individuals with no dependents, (2) $30,000 for two individuals with no dependents filing a jointly or separately, and (3) $35,000 for individuals with dependents. The maximum credit is $500 for each tax year the credit is claimed.
The credit cannot exceed the taxpayer's income tax liability for a taxable year. Any excess credit cannot be carried over to a subsequent taxable year and will not be refunded. The credit is not allowed for any amount paid in a given taxable year for a health benefit plan that is deducted by the taxpayer from federal adjusted gross income, or for any amount paid by the taxpayer or the taxpayer's employer for an employer-provided group health benefit plan. Only one credit is available per household per year.
If the state comptroller estimates that revenues for the state fiscal year ending in that income tax year exceed the state constitutional limitation on spending by less than $400 million (adjusted annually), the tax credit is not allowed for that taxable year (Colo. Rev. Stat. § 39-22-125).
A taxpayer business is allowed a credit for any taxable year during which his employment of new employees increases above his average employment in prior years. A $1,000 credit is permitted per new employee who, in the calendar year ending during the taxable year for which the credit is claimed, received annual earnings at an average rate of $15.50 or more per hour and was eligible for employer-provided accident or health coverage. A $500 credit is permitted per new employee who does not meet the $1,000 criteria, but who is employed in a revenue-producing enterprise.
The total credit allowed cannot exceed 3.25% of net income from the taxpayer's revenue-producing enterprise in which the employment occurred. The amount of this and all other permissible tax credits cannot exceed 50% of the taxpayer's tax liability. Any tax credit calculated in excess of the limitations can be carried over to the three succeeding taxable years. The oldest available unused credit must be applied first, so long as the employment level for which the credit was allowed is still maintained (Idaho Code § 63-3029F).
Taxpayers other than corporations, when determining adjusted gross income, may exclude any amounts paid for health insurance, or the value of any voucher or similar instrument used to provide health insurance for the taxpayer, his spouse, and dependents during the taxable year, to the extent not already excluded from federal gross income. Any amounts excluded cannot be claimed as a deduction when computing net income (Ky. Rev. Stat. Ann. § 141.010(10)(k)).
A person enrolled in an accident or health insurance plan may exclude from income the amount he paid in premiums for his family that taxable year. Income does not include premium contributions by an employer (Mich. Stat. Ann. § 206.510).
Eligible employers are entitled to a tax credit for premiums paid on behalf of eligible employees who elect to participate in a state-certified basic health benefits plan. The credit is $15 per month for each eligible employee and is allowed for two consecutive years. If the taxpayer's tax liability is less than the credit, the excess credit will be refunded.
An eligible employer is a corporation, partnership, or proprietorship that (1) has done business in the state for at least one year; (2) has not, within the 15 preceding months of offering to purchase the state-certified plan, provided group health insurance to at least 75% of its employees who are residents of the state and work an average of 24 hours or more a week for the employer; (3) offers the state-certified basic health benefits plan to all eligible employees; and (4) pays 50% or more of the full cost of the premium attributable to the employee for which the credit is claimed. Tax credits may not be granted to an employer who was not covered under a state-certified basic health benefits plan prior to July 1, 1995.
An eligible employee is an employee, proprietor, or partner of the employer claiming the credit who (1) is a state resident, (2) works an average of 24 hours a week or more for the employer, and (3) was not covered by a group health insurance policy or plan offered by the same employer within the 15 months preceding the offer to purchase the state-certified basic health benefits plan (Okla. Stat. Tit. 68, § 2357.31).
The credit does not apply to establishments receiving an incentive payment under the Oklahoma Quality Jobs Program (Okla. Stat. Tit. 68, § 3607).
A tax credit is allowed for premium costs paid or incurred during the tax year for a long-term care insurance policy (1) for the taxpayer, his dependents, or his parents or (2) offered by the taxpayer to his employees who work in Oregon.
The maximum credit that may be claimed is the lesser of (1) 15% of the total long-term care insurance premiums paid or incurred by the taxpayer during the tax year or (2) (a) $500 if the coverage is for the taxpayer, his dependents, or parents or (b) $500 per employee covered by the employer-offered policy.
The credit cannot exceed that taxpayer's tax liability and cannot carry forward to a future tax year (Or. Rev. Stat. § 315.610).
For a medical care savings account established in compliance with the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), the contribution to and interest earned on an account and account funds reimbursed to the accountholder for eligible medical expenses are exempt from personal income for income tax purposes (Pa. Stat. Ann. tit. 72, § 3402a.3).
An individual may deduct from state taxable income the portion of premium not deductible under federal Internal Revenue Code § 162(l), which relates to deductions for health care insurance costs of self-employed individuals (S.C. Code Ann. § 12-6-1140).