President Bush will propose a new tax deduction in 2007 State of the Union speech. Bush proposes that all Americans would be eligible for a standard deduction to cover the cost of health insurance. The New York Times summarizes the President's proposal succintly:

"The basic concept is that employer-provided health insurance, now treated as a fringe benefit exempt from taxation, would no longer be entirely tax-free. Workers could be taxed if their coverage exceeded limits set by the government. But the government would also offer a new tax deduction for people buying health insurance on their own."

The goal, as the President announced in his weekly radio address, is to "make basic private health insurance more affordable." But it's the complex details of the proposal that have raised concern.

Kay Bell explains the basics of the proposed deduction:

"Under the plan, families who purchase health insurance would be eligible for an automatic deduction of $15,000; the threshold is $7,500 for individuals. The tax break would be above-the-line, meaning that you don't have to itemize to take it."

The standard amount "would be indexed to the Consumer Price Index," according to the San Francisco Chronicle, so the deduction amount would rise with inflation.

The deduction would provide a tax break for taxpayers buying lower-cost health insurance policies. A family paying $10,000 a year in premiums would still get a $15,000 tax deduction, reducing taxable income by $5,000. This would provide an incentive for taxpayers to shop around for affordable coverage to get a better tax break. Currently, group health insurance coverage is a tax-free benefit to employees, which means employees and employers can offer health insurance coverage without paying any income taxes on the benefit.

The deduction would increase taxes for employees with more expensive health insurance plans. A family with paying $16,000 a year for group coverage would still get the $15,000 deduction, but would have to pay taxes on the extra $1,000. The San Francisco Chronicle explains, the amount over the standard deduction "would be subject to federal income tax, plus Social Security and Medicare tax." Again, under current law, the full $16,000 is a tax-free benefit to the family.

The proposed health insurance deduction, in brief:

• $7,500 above-the-line deduction for individual taxpayers
• $15,000 deduction for families
• Health insurance coverage would become a taxable benefit

Current tax law, in brief:

• Group health insurance coverage is tax-free under Code Section 419
• Private coverage is tax-deductible as an itemized deduction (for medical expenses in excess of 7.5% of adjusted gross income)
• Private coverage for self-employed taxpayers are deductible without itemizing

More news from around the Tax Web:

• Complex tax-cut proposal (San Francisco Chronicle)
• Bush to urge new tax plan for health care coverage (New York Times)
• Dubya's health insurance tax prescription (Don't Mess With Taxes)
• Could tax break be a healthcare benefit? (Marketplace podcast)
• Bush proposes health insurance tax reform (TaxProf, with roundup of media coverage)

Technorati tags: State of the Union, tax politics.