If your employer pays your health insurance, is it taxable?
“To sum it up…”
- Employer paid healthcare premiums are never tax deductible
- If you pay some portion of your premiums, you may be able to deduct it
- Tax rules have become more complicated since the advent of the Affordable Care Act (ACA) so it’s important to understand the current law
Group Health Insurance vs. Individual Health Insurance
Group Health Insurance: Generally, if you work for a company that offers its own health benefits, they have purchased a plan through a broker that will have lower rates for the same coverage than you would be able to buy on your own. The reason for that is the insurance company assumes less risk by covering many people.
Individual Health Insurance: This is coverage purchased by an individual or family with no contribution from an employer. Individual premiums tend to be higher for the same coverage because the risk is only on that individual or family group.
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Does your company pay your entire premium?
In past decades, many companies paid all their employees’ premiums. Unfortunately, those days are long gone. Most companies no longer pay one hundred percent of an employee’s premiums, though the amount of burden on the employee varies greatly.
For the sake of a simple example, let’s use an individual group premium of $500 per person per month.
The employer pays $400 of this amount and requires the employee to pay $100 toward their premium each month, usually by a payroll deduction.
What portion of my premium is taxable?
In our $500 per month example, the company pays $400. This portion is not taxable or tax deductible under any circumstances.
The question then becomes; can you deduct the $100 you are paying per month? The answer is “maybe.” The answer lies in the IRS rules about medical expenses.
Medical Expense Deduction Rules
Under the current Affordable Care Act (ACA) rules, you can deduct medical and dental expenses that exceed 10 percent of your Adjusted Gross Income (AGI). The AGI is calculated using the Form 1040, Schedule A and includes all of your income in a given year, minus alimony, student loans, and some other items.
For example, if your AGI was $60,000, and you have medical expenses totaling $6,500, you can only deduct $500. ($6,500 minus $6,000, which is ten percent of the AGI.) Seniors age 65 and older can deduct expenses above 7.5 percent of AGI.
As you can see by this example, most people will not be able to use this deduction. However, if you have had major medical expenses such as an extended hospital stay, major surgery, in-vitro fertilization, a new baby, home health care, rehabilitation or some other situation, it is worth taking the time to calculate. Your chances of being able to use it are also greater if your income is lower.
What can I deduct besides insurance premiums?
To determine if you can deduct any of your portion of employer-paid premiums, you need to determine if you have eligible expenses. The basic rule of thumb is that if you paid for it, you can deduct it. If the insurer paid it, you can’t deduct it.
There is a long list of typical medical insurance expenses that can be deducted on many websites. Here is one.
Some eligible expenses that are often overlooked:
- Transportation to and from medical care
- Wellness programs
- Weight-loss programs for a specific disease, as diagnosed by a physician
- Guide dogs for the blind or deaf
An Example of Premium Deductions
Some employers ask their employees to pay a significant portion of their premiums each month. If you find yourself in that situation, coupled with a relatively low salary and other significant medical expenses, you may be able to deduct your premiums.
In this example, the employee has a $30,000 AGI. Her portion of her employer group premiums is $400 per month or $4,800 per year. She has an accident, and between all of her out of pocket expenses for medical care, prescriptions, and other items, she incurs a final tally of $5,000. This adds up to a total of $9,800 for the year.
Ten percent of her AGI is $3,000. This means she can deduct everything about this, or $6,800. This is how premiums can play into a tax deduction.
The bottom line is that any insurance premiums paid by your employer can never be considered taxable income or deducted in any way.
If you pay some of your own premiums, and most people do, you may be able to deduct them if you have enough other expenses. If you are uncertain about whether you can deduct them, it’s best to consult a tax professional.
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