Issue Date: October 22, 1999 Effective for tax years beginning on or after January 1, 1999. RE: Self Employed Health Insurance The Georgia Legislature passed House Bill 1116, which enacted Georgia Code Section 48-7-27(a)(10). This bill establishes, for tax years beginning on or after January 1, 1999, a deduction for certain amounts paid by a self employed individual for health insurance. Paragraph 10 reads as follows: (10) With respect to a taxpayer who is a self-employed individual treated as an employee pursuant to Section 401(c)(1) of the Internal Revenue Code, an amount equal to the amount paid by the taxpayer during the taxable year for insurance which constitutes medical care for the taxpayer and the spouse and dependents of the taxpayer which is not otherwise deductible by the taxpayer for federal income tax purposes because the applicable percentage for that taxable year as specified pursuant to Section 162(l) of the Internal Revenue Code is less than 100 percent. The relevant parts of I.R.C. Section 162 are listed below. 162(l)(1)(A) In general. In the case of an individual who is an employee within the meaning of section 401(c)(1), there shall be allowed as a deduction under this section an amount equal to the applicable percentage of the amount paid during the taxable year for insurance which constitutes medical care for the taxpayer, his spouse, and dependents. 162(l)(2)(A) Dollar amount. No deduction shall be allowed under paragraph (1) to the extent that the amount of such deduction exceeds the taxpayer's earned income (within the meaning of section 401(c)) derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established. Question 1: When the taxpayers federal deduction under I.R.C. Section 162(l) for self employed health insurance is limited by the taxpayers earned income, is the adjustment provided by Georgia Code Section 48-7-27(a)(10) equal to the difference between the amount paid for such insurance and the taxpayers earned income? Answer 1: Georgia uses federal adjusted gross income as the starting point for Georgia taxable income (Georgia Code Section 48-7-27(a)). Georgia then adds or subtracts income and deductions that are specifically mentioned in the Georgia code. Georgia Code Section 48-7-27(a)(10) is silent regarding the earned income limitation and only addresses the percentage limitation. Accordingly, the adjustment provided by Georgia Code Section 48-7-27(a)(10) is no more than the difference between the amount paid for such insurance and the "applicable percentage" thereof for the taxable year in question, even when the federal deduction under I.R.C. Section 162(l) is less than the "applicable percentage" because of the earned income limitation. Question 2: The taxpayer deducts, on the federal schedule A, the portion of self employed health insurance that is not allowed as a deduction under I.R.C. Section 162(l) because of the percentage limitations in I.R.C. Section 162(l)(1)(A). Should the adjustment allowed by Georgia Code Section 48-7-27(a)(10) be reduced by the amount of health insurance deducted on the federal schedule A? Answer 2: If an amount that is not deductible under I.R.C. Section 162(l) because of the percentage limitations of I.R.C Section 162(l)(1)(A), is otherwise deductible on the taxpayers federal schedule A, no adjustment is allowed by Georgia Code Section 48-7-27(a)(10) for such amount. Accordingly, the adjustment provided by Georgia Code Section 48-7-27(a)(10) must be reduced by the amount of health insurance deducted on federal schedule A. Question 3: How should the Georgia deduction be computed in situations where question 2 applies? Answer 3: The medical expenses on the federal schedule A are only allowed when they exceed seven and one-half percent of the adjusted gross income. Because of this, not all of the medical expenses are deductible for federal purposes. Accordingly, the following calculation needs to be made to compute the deduction allowed by Georgia Code Section 48-7-27(a)(10). The allowed schedule A medical deductions should be divided by the total medical expenses on schedule A and then multiplied by the amount that is not allowed under the percentage limitations of I.R.C. Section 162(l). This amount should be subtracted from the amount that is not allowed under the percentage limitations of I.R.C. Section 162(l). Example: |