Is there such thing as tax relief on private health insurance?
Yes, there is such a thing as tax relief on private health insurance. The main type of tax relief comes in the form of deductions from your federal income tax. Additionally, which type of health insurance coverage you choose also may provide tax relief to you and your employer.
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There is also tax relief to be had by people who purchase private health insurance through their employers, the so called “Cafeteria Plans.” Additionally, tax free health insurance can be had by using health reimbursement arrangements (HRAs), health savings accounts (HSAs), or flexible spending accounts (FSAs).
Health Insurance Tax Deductions
Internal Revenue Service (IRS) publication 502 has all the details and information you need to see if you qualify and how to prepare your tax forms to get the deductions. There are limits and rules that apply, and these are detailed in the IRS form 1040 instruction.
Among the qualifying deductible expenses you may be able to take off your income taxes are those for health insurance premiums. Self-employed people should take particular note of this fact.
Tax Relief With a Cafeteria Plan
A cafeteria plan is a plan that pays for your health insurance premiums before your income is taxed as regular income. Your employer may offer this type of group health insurance plan and you can save substantial money by using one.
The health insurance premium costs you pay are deducted from your paycheck before any taxes are computed. You pay income tax based on a smaller amount of money earned so your net pay is higher. Section 125 of the Internal Revenue Code allows for this type of arrangement.
You need to be aware that by participating in a cafeteria plan your Social Security benefits will likely be reduced slightly when you retire. This is due to the fact that a smaller amount earned will be used to compute those benefits. In most cases, the advantage of the money you save right now will outweigh the reduced benefits later. Check with your financial advisor to review all possible implications using a cafeteria plan may have for you.
Tax Relief with HRA’s, HSA’s and FSA’s
Flexible spending accounts (FSAs) are a type of account in which you deposit money for qualifying health care expenses. Your pretax salary contribution is a type of checking account from which your health care plan administrator issues you checks to cover the health insurance claims that you submit.
There are limits on how much pretax income you may contribute to your FSA each year. Every dollar you put into your FSA will not count towards your income taxes. These funds are subject to forfeiture in certain situations; be sure to check with your financial advisor to see what impact they have on you.
A health savings accounts (HSA) is like a trust account that has funds deposited to it by your employer and yourself to cover future health care expenses. Generally used to cover out of pocket expenses, these accounts use pretax income as the funding source, saving you money and increasing your net take home pay. HSA health insurance may be a good option for you.
These HSA insurance accounts can also be used to store funds for future use and are not subject to forfeiture as may be the case with an FSA. IRS Section 223 covers these accounts and the Cornell University Law School site has information.
Health reimbursement arrangement (HRA) accounts are primarily for self-employed individuals. HRAs allow for the payment of health care insurance premiums and medical expenses as an expense of the business tax free. Small businesses can reimburse their employees for the individual policies they buy, which are already much cheaper than group policy participation.
The money paid by the employer for this purpose is a tax deduction for the business and tax free money for the employee. Further, it is left up to the employer to determine the maximum amount of this benefit to the employee can receive, if the HRA funds can roll over year to year, and whether a cap is placed on the lifetime accumulation of funds.
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