Your health insurance coverage probably came in handy several times over the past year. It all seemed so simple at the time—you paid a deductible, and your insurance usually kicked in the rest. But what do you do at tax time? Just what are you taxed on, and what can you deduct on your federal income tax return?
Your income taxes may be affected by two aspects of your health insurance plan—the premiums and the benefits.
You don't include employer-paid premiums in your income
For tax purposes, you can generally exclude from your income any health insurance premiums (including Medicare) paid by your employer. The premiums can be for insurance covering you, your spouse and any dependents. It doesn't matter whether the premiums paid for an employer-sponsored group policy or an individual policy. You can even exclude premiums that your employer pays when you are laid off from your job. Generally, these amounts are already excluded from your earnings.
What if your employer reimburses you for your premiums?
If you pay the premiums on your health insurance policy and receive a reimbursement from your employer for those premiums, the amount of the reimbursement is not taxable income. However, if your employer simply pays you a lump sum that may be used to pay health insurance premiums but is not required to be used for this purpose, that amount is taxable. Your taxable wages are typically already adjusted to reflect the appropriate taxation.
In most cases, you won't be able to deduct the premiums you pay
The deductibility of health insurance premiums follows the rules for deducting medical expenses. If you itemize deductions on Schedule A, and your unreimbursed medical expenses exceed 7.5% percent of your adjusted gross income (AGI) in any tax year, you may be able to take a deduction for the excess amount over the 7.5% threshold.
Unreimbursed medical expenses may include premiums paid for major medical, dental, vision, hospital, surgical and physician's expense insurance, and amounts paid out of your pocket for treatment not covered by your health insurance. In addition, if you have long-term care insurance, a portion of the premium you pay may be included in your total out of pocket medical expenses to get over the 7.5% threshold.
If you're self-employed, special deduction rules may apply
As an alternative to the general rule of deducting premiums as medical expenses, self-employed individuals may be able to deduct a percentage of their health insurance premiums as business expenses. These deductions aren't limited to amounts over 7.5% percent of AGI, as are medical expense deductions. They are limited, though, to amounts less than an individual's earned income.
If you qualify, you may be able to deduct 100 percent of the cost of health insurance that you provide for yourself, your spouse and your dependents. This deduction is taken on the front of your federal Form 1040; the portion of your health insurance premiums that is not deductible there can be added to your total medical expenses itemized in Schedule A.
As you can see, self-employed individuals may have choices as to where to deduct health insurance premiums they pay. Understanding these alternatives can save you tax dollars.
Your health insurance benefits typically aren't taxable
Whether we're talking about an employer-sponsored group plan or a health insurance policy you bought on your own, you generally aren't taxed on the health insurance benefits you receive.
What about reimbursements for medical care? You can generally exclude from income reimbursements for hospital, surgical or medical expenses that you receive from your employer's health insurance plan. These reimbursements can be for your own expenses or for those of your spouse or dependents. The exclusion applies regardless of whether your employer provides group or individual insurance or serves as a self-insurer. The reimbursements can be for actual medical care or for insurance premiums on your own health insurance.
Note that there is no dollar limit on the amount of tax-free medical reimbursements you can receive in a year. However, if your total reimbursements for the year exceed your actual expenses, and your employer pays for all or part of your health insurance premiums, you may have to include some of the excess in your income.
The professionals at Busey Wealth Management can help you with your financial planning—today and for years to come. To learn more, visit busey.com/wealth-management.
This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.
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