VARIOUS INCOME TAX DEDUCTIONS

HB0264

HOUSE BILL 264

57th legislature - STATE OF NEW MEXICO - second session, 2026

INTRODUCED BY

Mark Duncan
and
Mark B. Murphy
and
Jonathan A. Henry

and
Rebecca Dow
and
William A. Hall
II

AN ACT

RELATING TO TAXATION; PROVIDING AN INCOME TAX DEDUCTION FOR
INCOME FROM TIPS, INCOME FROM OVERTIME AND SOCIAL SECURITY
INCOME DEDUCTIBLE PURSUANT TO FEDERAL LAW; REPEALING THE
WORKING FAMILIES TAX CREDIT AND ENACTING THE EARNED INCOME TAX
CREDIT; CREATING THE FOSTER PARENT AND GUARDIAN INCOME TAX
CREDIT; AMENDING AND EXPANDING AN INCOME TAX DEDUCTION FOR
UNREIMBURSED OR UNCOMPENSATED MEDICAL CARE EXPENSES TO
TAXPAYERS OF ALL INCOME LEVELS; EXTENDING A GROSS RECEIPTS TAX
DEDUCTION FOR HEALTH CARE PRACTITIONERS AND AMENDING THE
DEDUCTION TO INCLUDE COINSURANCE PAID BY A PATIENT.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF NEW MEXICO:

SECTION 1.
A new section of the Income Tax Act is enacted

to read:

"[
NEW MATERIAL
] DEDUCTION--INCOME FROM QUALIFIED TIPS.--

A. A taxpayer may claim a deduction from net income

in an amount equal to the amount of qualified tips for which
the taxpayer is eligible to deduct pursuant to 26 U.S.C. 224,
as that section may be amended or renumbered.

B. A taxpayer allowed a deduction pursuant to this

section shall report the amount of the deduction to the

department in a manner required by the department.

C. The deduction provided by this section shall be
included in the tax expenditure budget pursuant to Section
7-1-84 NMSA 1978, including the annual aggregate cost of the

deduction.

D. As used in this section, "qualified tips" means

"qualified tips" as defined in 26 U.S.C. 224(d)."

SECTION 2.
A new section of the Income Tax Act is enacted
to read:

"[
NEW MATERIAL
] DEDUCTION--QUALIFIED OVERTIME
COMPENSATION.--

A. A taxpayer may claim a deduction from net income
in an amount equal to the amount of qualified overtime
compensation for which the taxpayer is eligible to deduct
pursuant to 26 U.S.C. 225, as that section may be amended or
renumbered.

B. A taxpayer allowed a deduction pursuant to this
section shall report the amount of the deduction to the
department in a manner required by the department.

C. The deduction provided by this section shall be
included in the tax expenditure budget pursuant to Section
7-1-84 NMSA 1978, including the annual aggregate cost of the
deduction.

D. As used in this section, "qualified overtime
compensation" means "qualified overtime compensation" as
defined in 26 U.S.C. 225(c)."

SECTION 3.
A new section of the Income Tax Act is enacted
to read:

"[
NEW MATERIAL
] DEDUCTION--SOCIAL SECURITY INCOME
DEDUCTIBLE PURSUANT TO FEDERAL LAW.--

A. A taxpayer may claim a deduction from net income
in an amount equal to the amount of social security income for
which the taxpayer is eligible to deduct pursuant to 26 U.S.C.
151, as that section may be amended or renumbered.

B. A taxpayer allowed a deduction pursuant to this
section shall report the amount of the deduction to the
department in a manner required by the department.

C. The deduction provided by this section shall be
included in the tax expenditure budget pursuant to Section
7-1-84 NMSA 1978, including the annual aggregate cost of the
deduction."

SECTION 4.
Section 7-2-18.15 NMSA 1978 (being Laws 2007,
Chapter 45, Section 9, as amended) is repealed and a new
Section 7-2-18.15 NMSA 1978 is enacted to read:

"7-2-18.15. [
NEW MATERIAL
] EARNED INCOME TAX CREDIT.--

A. The credit provided by this section may be
referred to as the "earned income tax credit". A taxpayer who
is an eligible individual may claim the earned income tax
credit against the taxpayer's tax liability imposed pursuant to
the Income Tax Act in an amount equal to the credit percentage
of so much of the taxpayer's earned income for the taxable year
as does not exceed the earned income amount; provided that the
amount of the credit shall not exceed the excess of:

(1) the credit percentage of the earned income
amount; over

(2) the phaseout percentage of so much of the
adjusted gross income or, if greater, the earned income of the
taxpayer for the taxable year as exceeds the phaseout amount.

B. The credit percentage and the phaseout
percentage shall be determined as follows:

In the case of a taxpayer

The credit

The phaseout

with:

percentage is:

percentage is:

1 qualifying child

11.55%

4.55%

2 qualifying children

13.6%

6.15%

3 or more qualifying children

15.3%

6.15%

No qualifying children

2.6%

2.1%.

C. Except as provided in Subsections E and F of
this section, the earned income amount and the phaseout amount
shall be determined as follows:

In the case of a taxpayer

The earned

The phaseout

with:

income amount

amount is:

is:

1 qualifying child

$11,000

$36,000

2 or more qualifying children

$15,000

$40,000

No qualifying children

$8,000

$25,000.

D. For married individuals filing joint returns,
the phaseout amount shall be increased by five thousand dollars
($5,000).

E. Except as provided in Subsection F of this
section, if the greater of an eligible individual's earned
income or adjusted gross income is less than the earned income
amount and the amount of credit is less than one hundred
dollars ($100), the amount of the credit shall be one hundred
dollars ($100).

F. For the 2027 taxable year and each subsequent
taxable year, the earned income amounts and phaseout amounts
shown in the table in Subsection C of this section, the amount
of credit provided in Subsection E of this section and the
phaseout amount provided in Subsection D of this section shall
be adjusted to account for inflation. The department shall
make the adjustment by multiplying each amount of credit by a
fraction, the numerator of which is the consumer price index
ending during the prior taxable year and the denominator of
which is the consumer price index ending in taxable year 2026.
The result of the multiplication shall be rounded to the
nearest ten dollars ($10.00), except that if the result would
be an amount less than the corresponding amount for the
preceding taxable year, then no adjustment shall be made.

G. The secretary shall reflect the provisions of
Subsections B and C of this section in tables that shall have
income brackets of not greater than fifty dollars ($50.00) each
for:

(1) earned income between zero and the amount
of earned income at which the credit is phased out under
Subsection C of this section; and

(2) adjusted gross income between the dollar
amount at which the phaseout begins under Subsection C of this
section and the amount of adjusted gross income at which the
credit is phased out under that subsection.

H. That portion of credit that exceeds a taxpayer's
tax liability in the taxable year in which the credit is
claimed shall be refunded to the taxpayer. A refund made to a
taxpayer pursuant to this section shall not be treated as
income.

I. A taxpayer allowed a tax credit pursuant to this
section shall report the amount of the credit to the department
in a manner required by the department.

J. The credit provided by this section shall be
included in the tax expenditure budget pursuant to Section
7-1-84 NMSA 1978, including the total annual aggregate cost of
the credit.

K. As used in this section:

(1) "earned income" means "earned income" as
defined in 26 U.S.C. 32(c)(2);

(2) "eligible individual" means a resident who
is an "eligible individual" pursuant to the federal earned
income tax credit who is eligible to claim the federal earned
income tax credit in the taxable year;

(3) "federal earned income tax credit" means
the federal tax credit allowed pursuant to 26 U.S.C. 32, as
that section may be amended or renumbered; and

(4) "qualifying child" means "qualifying
child" as defined by Section 152(c) of the Internal Revenue
Code, as that section may be amended or renumbered, but
includes any minor child or stepchild of the taxpayer who would
be a qualifying child for federal income tax purposes if the
public assistance contributing to the support of the child or
stepchild was considered to have been contributed by the
taxpayer."

SECTION 5.
A new section of the Income Tax Act is enacted
to read:

"[
NEW MATERIAL
] CREDIT--FOSTER PARENT AND GUARDIAN INCOME
TAX CREDIT.--

A. For taxable years ending prior to January 1,
2032, a taxpayer who is a resident, who is not a dependent of
another individual and who is a foster parent or guardian of a
child may claim a credit against the taxpayer's tax liability
imposed pursuant to the Income Tax Act. The credit authorized
pursuant to this section may be referred to as the "foster
parent and guardian income tax credit".

B. The amount of the tax credit shall be in an
amount equal to two hundred fifty dollars ($250) for each month
the taxpayer is a foster parent or guardian of a child in the
taxable year in which the tax credit is claimed; provided that
the taxpayer shall be a foster parent or guardian for more than
fifty percent of that month; and provided further that the
maximum amount of credit that may be claimed by a taxpayer in a
taxable year is three thousand dollars ($3,000).

C. A taxpayer shall apply for certification of
eligibility for the tax credit from the children, youth and
families department on forms and in the manner prescribed by
that department. Except as provided in Subsection E of this
section, only one tax credit shall be certified per taxpayer
per taxable year. If the children, youth and families
department determines that the taxpayer meets the requirements
of this section, that department shall issue a dated
certificate of eligibility to the taxpayer providing the amount
of tax credit for which the taxpayer is eligible and the
taxable years in which the credit may be claimed. The
children, youth and families department shall provide the
department with the certificates of eligibility issued pursuant
to this subsection in an electronic format at regularly agreed-upon intervals.

D. That portion of the tax credit that exceeds a
taxpayer's income tax liability in the taxable year in which
the credit is claimed shall be refunded to the taxpayer.

E. Married individuals filing separate returns for
a taxable year for which they could have filed a joint return
may each claim only one-half of the tax credit that would have
been claimed on a joint return.

F. A taxpayer allowed to claim a tax credit
pursuant to this section shall claim the tax credit in a manner
required by the department. The credit shall be claimed within
one taxable year of the end of the year in which the children,
youth and families department certifies the credit.

G. The credit provided by this section shall be
included in the tax expenditure budget pursuant to Section
7-1-84 NMSA 1978, including the annual aggregate cost of the
credit.

H. As used in this section:

(1) "child" means an unemancipated individual
who has not reached eighteen years of age;

(2) "foster parent" means a person licensed or
certified by the children, youth and families department or a
child placement agency to provide care for children in the
custody of that department or the agency; and

(3) "guardian" means a person appointed as a
guardian by a court or an Indian tribal authority pursuant to
the Kinship Guardianship Act, but does not include a person
appointed as a guardian ad litem."

SECTION 6.
Section 7-2-37 NMSA 1978 (being Laws 2015 (1st
S.S.), Chapter 2, Section 3) is amended to read:

"7-2-37. DEDUCTION--UNREIMBURSED OR UNCOMPENSATED MEDICAL

CARE EXPENSES.--

A. [
Prior to January 1, 2025
] A taxpayer may claim
a deduction from net income in an amount [
determined pursuant
to Subsection B of this section for medical care
]
equal to
medical
expenses paid during the taxable year for medical care
of the taxpayer, the taxpayer's spouse or a dependent if the
expenses are not reimbursed or compensated for by insurance or
otherwise and have not been included in the taxpayer's itemized
deductions, as defined in Section 63 of the Internal Revenue
Code, for the taxable year.

[
B. The deduction provided in Subsection A of this
section may be claimed in an amount equal to the following
percentage of medical care expenses paid during the taxable
year based on the taxpayer's filing status and adjusted gross
income as follows:

(1) for surviving spouses and married
individuals filing joint returns:

If adjusted gross income is:

The following percent of

medical care expenses

paid may be deducted:

Not over $30,000

25 percent

More than $30,000 but not

more than $70,000

15 percent

Over $70,000

10 percent;

(2) for single individuals and married
individuals filing separate returns:

If adjusted gross income is:

The following percent of
medical care expenses
paid may be deducted:

Not over $15,000

25 percent

More than $15,000 but not more than

$35,000

15 percent

Over $35,000

10 percent; and

(3) for heads of household:

If adjusted gross income is:

The following percent of

medical care expenses
paid may be deducted:

Not over $20,000

25 percent

More than $20,000 but not more than

$50,000

15 percent

Over $50,000

10 percent.
]

B. A taxpayer allowed a deduction pursuant to this
section shall report the amount of the deduction to the
department in a manner required by the department.

C. The deduction provided by this section shall be
included in the tax expenditure budget pursuant to Section
7-1-84 NMSA 1978, including the annual aggregate cost of the
deduction.

[
C.
]
D.
As used in this section:

(1) "dependent" means "dependent" as defined
in Section 152 of the Internal Revenue Code;

(2) "health care facility" means a hospital,
outpatient facility, diagnostic and treatment center,
rehabilitation center, free-standing hospice or other similar
facility at which medical care is provided;

(3) "medical care" means the diagnosis, cure,
mitigation, treatment or prevention of disease or for the
purpose of affecting any structure or function of the body;

(4) "medical care expenses" means amounts paid
for:

(a) the diagnosis, cure, mitigation,
treatment or prevention of disease or for the purpose of
affecting any structure or function of the body, excluding
cosmetic surgery, if provided by a physician or in a health
care facility;

(b) prescribed drugs or insulin;

(c) qualified long-term care services as
defined in Section 7702B(c) of the Internal Revenue Code;

(d) insurance covering medical care,
including amounts paid as premiums under Part B of Title 18 of
the
federal
Social Security Act or for a qualified long-term
care insurance contract defined in Section 7702B(b) of the
Internal Revenue Code, if the insurance or other amount is paid
from income included in the taxpayer's adjusted gross income
for the taxable year;

(e) nursing services, regardless of
where the services are rendered, if provided by a practical
nurse or a professional nurse licensed to practice in the state
pursuant to the Nursing Practice Act;

(f) specialized treatment or the use of
special therapeutic devices if the treatment or device is
prescribed by a physician and the patient can show that the
expense was incurred primarily for the prevention or
alleviation of a physical or mental defect or illness; and

(g) care in an institution other than a
hospital, such as a sanitarium or rest home, if the principal
reason for the presence of the person in the institution is to
receive the medical care available; provided that if the meals
and lodging are furnished as a necessary part of such care, the
cost of the meals and lodging are "medical care expenses";

(5) "physician" means a medical doctor,
osteopathic physician, dentist, [
podiatrist
]
podiatric
physician
, chiropractic physician or psychologist licensed or
certified to practice in New Mexico; and

(6) "prescribed drug" means a drug or
biological that requires a prescription of a physician for its
use by an individual."

SECTION 7.
Section 7-9-93 NMSA 1978 (being Laws 2004,
Chapter 116, Section 6, as amended) is amended to read:

"7-9-93. DEDUCTION--GROSS RECEIPTS--CERTAIN RECEIPTS FOR
SERVICES PROVIDED BY HEALTH CARE PRACTITIONER OR ASSOCIATION OF
HEALTH CARE PRACTITIONERS.--

A. Receipts of a health care practitioner or an
association of health care practitioners for commercial
contract services or medicare part C services paid by a managed
care organization or health care insurer may be deducted from
gross receipts if the services are within the scope of practice
of the health care practitioner providing the service.
Receipts from fee-for-service payments by a health care insurer
may not be deducted from gross receipts.

B. Prior to July 1, [
2028
]
2032
, receipts from

coinsurance
, a copayment or deductible paid by an insured or
enrollee to a health care practitioner or an association of
health care practitioners for commercial contract services
pursuant to the terms of the insured's health insurance plan or
enrollee's managed care health plan may be deducted from gross
receipts if the services are within the scope of practice of
the health care practitioner providing the service.

C. The deductions provided by this section shall be
applied only to gross receipts remaining after all other
allowable deductions available under the Gross Receipts and
Compensating Tax Act have been taken.

D. A taxpayer allowed a deduction pursuant to this
section shall report the amount of the deduction separately in
a manner required by the department.

E. The deductions provided by this section shall be
included in the tax expenditure budget pursuant to Section
7-1-84 NMSA 1978 with an analysis of the cost of the
deductions.

F. As used in this section:

(1) "association of health care practitioners"
means a corporation,
an
unincorporated business entity or other
legal entity organized by, owned by or employing one or more
health care practitioners; provided that the entity is not:

(a) an organization granted exemption
from the federal income tax by the United States commissioner
of internal revenue as organizations described in Section
501(c)(3) of the United States Internal Revenue Code of 1986,
as that section may be amended or renumbered; or

(b) a health maintenance organization,
a

hospital,
a
hospice,
a
nursing home or an entity that is solely
an outpatient facility or intermediate care facility licensed
pursuant to the [
Public Health Act
]
Health Care Code
;

(2) "commercial contract services" means
health care services performed by a health care practitioner
pursuant to a contract with a managed care organization or
health care insurer other than those health care services
provided for medicare patients pursuant to Title 18 of the
federal Social Security Act or for medicaid patients pursuant
to Title 19 or Title 21 of the federal Social Security Act;

(3) "copayment"
or "coinsurance"
means [
a
fixed dollar
]
an
amount that a health care insurer or managed
care health plan requires an insured or enrollee to pay upon
incurring an expense for receiving medical services;

(4) "deductible" means the amount of covered
charges an insured or enrollee is required to pay in a plan
year for commercial contract services before the insured's
health insurance plan or enrollee's managed care health plan
begins to pay for applicable covered charges;

(5) "fee-for-service" means payment for health
care services by a health care insurer for covered charges
under an indemnity insurance plan;

(6) "health care insurer" means a person that:

(a) has a valid certificate of authority
in good standing pursuant to the New Mexico Insurance Code to
act as an insurer,
a
health maintenance organization or
a

nonprofit health care plan or prepaid dental plan; and

(b) contracts to reimburse licensed
health care practitioners for providing basic health services
to enrollees at negotiated fee rates;

(7) "health care practitioner" means:

(a) a chiropractic physician licensed
pursuant to the provisions of the Chiropractic Physician
Practice Act;

(b) a dentist or dental hygienist
licensed pursuant to the Dental Health Care Act;

(c) a doctor of oriental medicine
licensed pursuant to the provisions of the Acupuncture and
Oriental Medicine Practice Act;

(d) an optometrist licensed pursuant to
the provisions of the Optometry Act;

(e) an osteopathic physician licensed
pursuant to the provisions of the Medical Practice Act;

(f) a physical therapist licensed
pursuant to the provisions of the Physical Therapy Act;

(g) a physician or physician assistant
licensed pursuant to the provisions of the Medical Practice
Act;

(h) a podiatric physician licensed
pursuant to the provisions of the Podiatry Act;

(i) a psychologist licensed pursuant to
the provisions of the Professional Psychologist Act;

(j) a registered lay midwife registered
by the department of health;

(k) a registered nurse or licensed
practical nurse licensed pursuant to the provisions of the
Nursing Practice Act;

(l) a registered occupational therapist
licensed pursuant to the provisions of the Occupational Therapy
Act;

(m) a respiratory care practitioner
licensed pursuant to the provisions of the Respiratory Care
Act;

(n) a speech-language pathologist or
audiologist licensed pursuant to the Speech-Language Pathology,
Audiology and Hearing Aid Dispensing Practices Act;

(o) a professional clinical mental
health counselor, marriage and family therapist or professional
art therapist licensed pursuant to the provisions of the
Counseling and Therapy Practice Act who has obtained a master's
degree or a doctorate;

(p) an independent social worker
licensed pursuant to the provisions of the Social Work Practice
Act; and

(q) a clinical laboratory that is
accredited pursuant to 42 U.S.C. Section 263a but that is not a
laboratory in a physician's office or in a hospital defined
pursuant to 42 U.S.C. Section 1395x;

(8) "managed care health plan" means a health
care plan offered by a managed care organization that provides
for the delivery of comprehensive basic health care services
and medically necessary services to individuals enrolled in the
plan other than those services provided to medicare patients
pursuant to Title 18 of the federal Social Security Act or to
medicaid patients pursuant to Title 19 or Title 21 of the
federal Social Security Act;

(9) "managed care organization" means a person
that provides for the delivery of comprehensive basic health
care services and medically necessary services to individuals
enrolled in a plan through its own employed health care
providers or by contracting with selected or participating
health care providers. "Managed care organization" includes
only those persons that provide comprehensive basic health care
services to enrollees on a contract basis, including the
following:

(a) health maintenance organizations;

(b) preferred provider organizations;

(c) individual practice associations;

(d) competitive medical plans;

(e) exclusive provider organizations;

(f) integrated delivery systems;

(g) independent physician-provider
organizations;

(h) physician hospital-provider
organizations; and

(i) managed care services organizations;
and

(10) "medicare part C services" means services
performed pursuant to a contract with a managed health care
provider for medicare patients pursuant to Title 18 of the
federal Social Security Act."

SECTION 8.
APPLICABILITY.--The provisions of Sections 1
through 6 of this act apply to taxable years beginning on or
after January 1, 2026.

SECTION 9.
EFFECTIVE DATE.--The effective date of the
provisions of Section 7 of this act is July 1, 2026.

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