As things currently stand under federal tax law, it’s not possible to get a tax rebate for private health insurance costs. There may be some exceptions at the state level, which is something you’ll have to check on your own, but such rebates don’t exist at the federal level. What the federal government does allow is a tax deduction.
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For the purposes of this discussion it’s important to define the difference between a deduction and a rebate. A deduction, also known as a tax credit, simply allows you to subtract a certain amount of money from your total income before your tax liability is calculated. A rebate is actual cash returned to you by way of a government check or direct deposit. Government rebates are few and far between while deductions are plentiful.
Deductions for Private Health Insurance Premiums
An MSN Money report from May 2010 advises American taxpayers that they are able to deduct the cost of their private health insurance premiums as long as their total healthcare costs for the year exceeded 7.5% of their adjusted gross income. For example, if your adjusted gross income is a $30,000 your total healthcare expenses must exceed $2,250 in order to include your health insurance premiums in the deduction.
Self-employed individuals can deduct their health insurance premiums without reaching the 7.5% threshold.
If you plan to seek a deduction for your health insurance premiums you should understand that it doesn’t reduce your total tax liability all that much. Assume that your total healthcare expenses for the year, including your health insurance premiums, add up to $5,000. Claiming the deduction will not decrease your total tax liability by that amount, it will reduce your taxable income by $5,000. That might save you $25 or so in terms of the amount of federal income taxes you pay.
Deductions For Self-Employed
Intuit’s Turbo Tax explains that the health insurance deduction is a much better deal for people who are self-employed because he they are not required to meet the 7.5% threshold. Furthermore, the deduction applies to health insurance premiums that self-employed people pay for themselves, their spouses, and dependent children. Finally, the deduction can be used to calculate both their personal income tax and their Social Security tax.
The self-employed individual pays the entire cost of health insurance premiums on his own, unlike the worker who usually only pays one-third of the cost.
This may seem like an unfair advantage for the self-employed until you consider what the total cost of health insurance really is. For example, a worker employed by a local small business may pay $500 per month towards his health insurance. At the same time his employer will pay another $1200, making the total cost of the health insurance plan approximately $1,700 per month.
Affordable Care Act and Rebates
It is true that the Affordable Care Act does provide for rebates to subscribers of private health insurance. However, the rebates in question are not tax rebates in any way, shape, or form. They are rebates issued to customers according to the new government regulations on health insurance companies. Whether or not you receive a rebate will depend on how much you’ve paid into your own health insurance plan.
According to the regulations, health insurance companies will be required to spend a minimum of 80% of collected premiums either directly on health care expenses or on improving their delivery systems. Any health insurance company that does not meet that threshold must return a proportional amount of money to subscribers in the form of a rebate. This sounds like a good plan in principle, but the average consumer will not receive a penny from their insurance providers.
According to Forbes contributing author Tim Worstall, most health insurance providers already spend in excess of 100% of collected premiums directly on patient health care costs.
If you’ve heard from various sources that the federal government provides tax rebates for health insurance premiums, think again. The best you can do is to deduct the cost of your health insurance premiums on our federal tax returns. That amounts to some savings, albeit insignificant by most standards.
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