REQUEST LETTER

02-003

DATE

NAME

COMPANY

ADDRESS

Re: NAME

#####

Filing Period: #####

On behalf of the above named taxpayers, they received a notice (copy enclosed), requesting verification to determine the health care insurance premium deduction. I talked with TP REP and her supervisor and they recommended I corresponded with you regarding the facts relating to this deduction.

NAME is an independent insurance agent who receives a W-2 from an insurance company as a statutory employee. NAME also files a Schedule C and reports self-employed income from this same insurance company as well as other insurance companies. The company that provides NAME with his W-2 also pays a portion of his health insurance premiums and requires NAME to pay a portion due to the fact that he is a statutory employee and receives income from this company that is reported on a Form 1099-MISC.

I recognize that the Utah law eliminates the deduction for health insurance premiums when it is partially reimbursed or funded by an employer. However, the majority of NAME income is reported on his Schedule C and his insurance premiums are paid in relationship to that income. This seems quite similar to a two percent (2%) shareholder of an S Corporation that is required to add the company paid health insurance premiums to his W-2 and is allowed deduction on his federal and state income tax returns.

It is informally requested that you review this information and inform us as to how the Utah State Tax Commission might rule on this issue. If this isn’t possible we understand. We are trying to comply with this state rule as it relates to statutory employees that for federal purposes are deemed to be self-employed.

Your response to this matter is greatly appreciated so that a determination can be made as soon as possible if additional tax is due or the return will be accepted as filed.

Kindest personal regards,

NAME

RESPONSE LETTER

DATE

NAME

ADDRESS

Re: Advisory Opinion – Health insurance deduction from income tax

Dear NAME

You have requested the Commission to address whether health insurance premiums may be deducted from income when those premiums are partially paid by an employer to an independent contractor insurance agent. Your client, the insurance agent, receives a W-2 from the insurance company (“Company”) he represents. Your client and the Company each pay a portion of the health insurance premium, in proportion to the amount of income paid by that employer relative to the employee’s total income.

Utah Code Ann. §59-10-114 (2) (h) allows certain amounts paid for health care insurance to be deducted from taxable income. However, under Utah Code Ann. §59-10-114 (3) (e) (ii), the deduction is not allowed if the taxpayer is eligible to participate in a health plan that is funded in whole or part by the taxpayer’s employer. Your client is not only eligible, but participates in a health plan that is partially funded by his employer. Accordingly, subsection 114 (3) (e) (ii) provides that your client may not deduct the amounts he paid for health insurance from his taxable income.

The situation where a two percent (2%) shareholder of an S corporation adds health insurance premiums to his W-2 and still takes a deduction from taxable income is not analogous. Because the shareholder must report the premiums on his W-2, the shareholder, not the S-corporation is effectively paying the entire premium, even though the check is written by the S-Corporation. In your situation, part of the economic burden is actually borne by the employer and the statute, disallows any deduction. Accordingly, the pass through principles regarding income and deductions do not apply to him.

Should you need further clarification from the Commission, you may contact us.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/PL

02-003