Income tax deduction for medical expenses

(R.C. 5747.01(A)(11)(b))

Currently, in computing Ohio income taxes, a taxpayer may deduct unreimbursed medical expenses to the extent those expenses exceed 7.5% of the taxpayer's federal adjusted gross income (FAGI). The kinds of medical expenses that are deductible for Ohio income tax purposes are the same as the kinds that are deductible for federal income tax purposes.

The bill increases the deductible amount by permitting taxpayers to deduct unreimbursed medical expenses to the extent they exceed 5% of FAGI. The enhanced deduction is available for taxable years beginning in or after 2005.

Income tax treatment of Health Savings Accounts

(R.C. 5747.01(A)(15))

The bill permits taxpayers to claim the same income tax preferences that federal law allows for "health savings accounts." Under recent federal legislation,[1] individuals who open and hold health savings accounts are allowed to deduct cash contributions to the account, up to specified annual limits. Also, investment earnings on account balances are exempt from taxation. (The deduction is reduced by the amount of account withdrawals that are spent for something other than medical expenses.) Health savings accounts may be held by any person, whether or not employed, as long as the person is covered by a "high-deductible" health plan and is not covered by Medicare or another general health plan.[2]

Specifically, the bill permits taxpayers to deduct cash contributions to a health savings account to the same extent contributions are deductible for federal income tax purposes. The federal tax-deductible amount is equal to the deductible under the high-deductible health plan, but is limited to a maximum annual dollar amount. The maximum annual dollar limit depends on whether the health plan covers only one person or covers two or more persons. The annual limits for 2005 are as follows:

Annual tax-deductible contribution limits for health savings accounts
*Health plan coverage*	*Age under 55*	*Age 55 or over*
Individual	$2,650	$3,250
Multiple	$5,250	$5,850

Note: Limits are to be adjusted annually for inflation, and the limits for ages 55 and over increase by $100 per year until 2009.

The tax-deductible amount is reduced by one-twelfth for every month the taxpayer is not covered by a high-deductible health plan.

In the case of most Ohio taxpayers, the federal tax deduction will automatically reduce the Ohio taxable income reported by the taxpayer. But the bill ensures that the federal deduction is recognized by law for Ohio tax purposes, because changes in a federal law are not necessarily incorporated automatically into an Ohio law that refers to the federal law.[3]

The bill also requires a taxpayer who spends money from a health savings account for anything other than medical expenses to add that amount to Ohio taxable income (if it has not already been added back for federal tax purposes). This ensures consistency with the federal law.

Similarly, investment earnings on health savings accounts are not included in federal adjusted gross income, so the earnings will not appear in a taxpayer's reported Ohio taxable income. The bill ensures that Ohio law recognizes and adopts the federal tax exclusion for investment earnings. The bill also requires taxpayers to add back investment earnings on any account funds spent on nonmedical expenses, consistent with federal tax treatment.

HISTORY

ACTION	DATE	JOURNAL ENTRY

Introduced	02-08-05	p. 191

h0436-i-125.doc/kl

[1] Section 1201 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-203, 118 Stat. 493.

[2] To qualify as a high deductible health plan, a plan must have an annual deductible of at least $1,000 (individual coverage) or $2,000 (multiple coverage), and the sum of the deductible and other out-of-pocket expenses must be no more than $5,000 (individual) or $10,000 (multiple). Special rules apply to some plans.

[3] The "nondelegation" provision of the Ohio Constitution, Article II, Section 26, has been construed in some cases to mean that changes in a federal statute that is incorporated by reference in an Ohio statute do not change the meaning or scope of the Ohio statute unless the General Assembly enacts the changes.