You asked for a list of states that have an income tax deduction for nursing home payments.  You also asked for their policy rationale for such deductions. This report updates our 2008 report on State Income Tax Deductions for Medical Expenses (2008-R-0591)

SUMMARY

A search of the CCH state tax database yielded no states that have a state income tax deduction specifically for payments to nursing homes.  But many states have state tax deductions for medical expenses that either match or are based on the federal tax deduction.  These deductions include certain nursing home payments.  The major policy rationale for state tax deductions for medical expenses appears to be conformity with the federal tax code.

For the 2010 tax year, of the 41 states with state income taxes, 35 allowed deductions for medical expenses, including nursing home payments. This number will drop by one for the 2011 tax year. Starting January 1, 2011, Rhode Island eliminated itemized deductions from its state income tax.

In 21 of the states with medical expense deductions for 2010, state deductions matched the federal deduction while the remaining 14 state deductions differed from the federal deduction in one or more respects. The most common difference is to allow additional expenses to be deducted. All 35 states with 2010 deductions included nursing home payments that match the federal definition.

FEDERAL MEDICAL EXPENSE DEDUCTION

When calculating federal taxable income, a taxpayer may deduct eligible, unreimbursed medical and dental expenses that exceed 7.5% of his or her federal adjusted gross income (AGI). The federal medical expense deduction threshold is scheduled to increase to 10% of federal AGI in 2013 for taxpayers under age 65 and in 2016 for taxpayers age 65 and over.

For federal tax purposes, medical expenses can include the cost of medical care in a nursing home, home for the aged, or similar institution, for the taxpayer or his or her spouse or dependents. It can include the cost of meals and lodging in the home if a principal reason for being in the home is to get medical care. If the reason for being in the home is personal, such as that the person is too frail to care for him or herself at home, the deductible expenses must exclude the cost of meals and lodging. However, in such a case, a taxpayer can still include in the medical expense deduction that part of the nursing home payment that is for medical or nursing care (Medical and Dental Expenses Including the Heath Coverage Tax Credit, IRS Publication 502, 2010)

STATE MEDICAL EXPENSE DEDUCTIONS

Of the 41 states with broad-based state personal income taxes, for the 2010 tax year, 35 allowed deductions or exemptions for qualified medical expenses, including qualified payments to nursing homes, when calculating state tax liability. Six, including Connecticut, did not. Starting with the 2011 tax year, this number increases to seven with the addition of Rhode Island, which no longer allows any state income tax deductions.

Of the 35 states that had medical expense deductions in 2010, 21 had the same deduction allowed under the federal tax law and 14 had state deductions that vary from the federal deduction in one or more respects. Table 1 shows the medical expense deduction each state allowed, if any, for the 2010 tax year.

Table 1: State Income Tax Deductions for Medical Expenses

2010 Tax Year

Sources: CCH State Tax Database; State income tax instructions and forms

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