CHAPTER 222

An Act allowing the self-employed to deduct health insurance costs under the gross income tax, supplementing Title 54A of the New Jersey Statutes and amending N.J.S.54A:3-3.

Be It Enacted by the Senate and General Assembly of the State of New Jersey:

C.54A:3-5 Self-employed individuals, deduction for health insurance costs.

1. A taxpayer who is a "self-employed individual" within the meaning of clause (B) of paragraph (1) of subsection (c) of section 401 of the federal Internal Revenue Code of 1986, 26 U.S.C.s.401, and a taxpayer treated as such a "self-employed individual" under that section pursuant to section 1372 of the federal Internal Revenue Code of 1986, 26 U.S.C.s.1372,hall be allowed to deduct from the taxpayer's gross income an amount equal to the amount paid during the taxable year for insurance which constitutes medical care for the taxpayer, the taxpayer's spouse, and dependents; provided however, that the amount of such deduction shall not exceed the taxpayer's "earned income," as defined pursuant to subsection (c) of section 401 of the federal Internal Revenue Code of 1986, 26 U.S.C.s.401, derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established, and provided further that no deduction shall be allowed for coverage of any month for which the taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the spouse of the taxpayer.

2. N.J.S.54A:3-3 is amended to read as follows:

Medical expenses.

54A:3-3. Medical expenses. (a) Each taxpayer shall be allowed to deduct from the taxpayer's gross income medical expenses for the taxpayer, the taxpayer's spouse, and the taxpayer's dependents with respect to such expenses that were paid during the taxable year and to the extent that such medical expenses exceed 2% of the taxpayer's gross income. In the case of a nonresident, gross income shall mean gross income which such nonresident would have reported if the taxpayer had been subject to tax during the entire taxable year as a resident.

(b) Special Rule for Decedents.

(1) Treatment of expenses paid after death. Expenses for the medical care of the taxpayer which are paid out of the taxpayer's estate during the one-year period beginning with the day after the day of the death shall be treated as paid by the taxpayer at the time incurred.

(2) Limitation. Paragraph (1) shall not apply if the amount paid is not allowable as a deduction in computing medical expense deductions for federal income tax purposes.

(c) Disallowance of amounts allowed for other purposes.

(1) Any expenses allowed as a deduction of expenses for household and dependent care services necessary for gainful employment shall not be allowed as an expense paid for medical care for purposes of this section.

(2) Any amounts paid or distributed out of a medical savings account that are excluded from gross income pursuant to section 5 of P.L.1997, c.414 (C.54A:6-27) shall not be allowed as an expense paid for medical care for purposes of this section.

(3) Any amounts allowed as a deduction for the health insurance costs of the self-employed pursuant to section 1 of PL.1999, c.222 (C.54A:3-5) shall not be allowed as an expense paid for medical care for purposes of this section.

3. This act shall take effect immediately and apply to taxable years beginning on or after the January 1 next following enactment.

Approved September 22, 1999.