THE EFFECT OF THE COBRA SUBSIDY ON THE WISCONSIN INCOME TAX MEDICAL CARE INSURANCE DEDUCTION
Under Wisconsin law, individuals are allowed to deduct on their Wisconsin Income tax return a portion of the amount that they pay for their individual medical care insurance. Any individual that is self-employed, may deduct 100% of the amount paid by that person for their medical care insurance. For individuals that are employed, and if that person's employer contributed nothing toward that person's medical care insurance, then that person can deduct 100% of the amount paid by that person for medical care insurance. However, if the individual is employed, and if that person's employer contributed a portion of the cost of that person's medical care insurance, then that person can deduct only 10% of what that person actually paid for his or her medical care insurance. Finally, if an individual is neither employed, nor self-employed, that person may deduct 66.7% of the amount paid by that person for medical care insurance.
So what is the effect of the COBRA subsidy under the federal American Recovery and Reinvestment Act of 2009 (ARRA) on the Wisconsin subtraction for medical care insurance?
ARRA provides a 65% reduction in the premiums otherwise payable under COBRA by certain involuntarily terminated individuals. In other words, these qualifying individuals only have to pay 35% of the usual required premium under COBRA. So, with regard to the Wisconsin subtraction for medical care insurance, the 35% is the amount that these qualifying individuals are paying for their medical care insurance. In addition, until the individual gets another job, by definition, the qualifying person would be considered unemployed and not self-employed. So, this qualifying individual can deduct 66.7% of what is paid for medical care insurance by that person. So, if the COBRA premium is $1,000 per month, this qualifying person will actually pay $350. Of this $350, the qualifying person can deduct $233.45 (66.7% of $350.00) as medical care insurance on his or her Wisconsin 2009 Income Tax Return.
Also be aware that ARRA provides for a recapture of the subsidy if a qualified person's modified adjusted gross income exceeds $145,000 for single ($290,000 for married filing jointly). In other words, the individual would have to pay the subsidy back on his or her federal tax return. In this case, with regard to the Wisconsin subtraction for medical care insurance, the amount that is recaptured is considered an amount paid for medical care insurance and may be claimed in the year of the recapture. So, if the COBRA premium is again $1,000, the subsidy would be $650, and the amount paid by the qualifying person would be $350. As previously stated, the qualifying individual can deduct $233.45 on his or her Wisconsin 2009 Income Tax Return. However, if this individual had a modified adjusted gross income of $145,000 for single ($290,000 for married filing jointly) then the amount of the subsidy will need to be recaptured on that individual's Federal tax return. So, the individual will have to pay an extra $650 in federal tax when he or she files the 2009 Federal Income Tax Return in 2010. Since this $650 was paid in 2010, it may be used by the individual in computing the subtraction for medical care insurance on the 2010 Wisconsin Income Tax Return.
If you have questions, please contact Cliff Bobholz or your primary Boardman attorney.
This legal update is not legal advice. Individuals should seek advice based on their particular circumstances from their own counsel.