Health Insurance

Why Your Health Insurance Premiums Are Taxable

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Health insurance premiums are taxable because they are considered self-employment income by the Internal Revenue Service (IRS). This means that you report the amount you pay for your health insurance on your tax return and you must pay federal taxes on that amount as well as state and local taxes where applicable. The majority of people who have health insurance also have an employer paying part of their premiums as well, which means they aren’t paying 100% of their premiums out of pocket, but rather they will include it in their income as self-employment income and pay taxes on it at a later date.


Facts on health care

Before you file that 1040, it’s good to know some facts about health care and taxes. According to IRS Publication 502: Medical and Dental Expenses, taxpayers can deduct eligible medical expenses that exceed 7.5% of their adjusted gross income (AGI). Health insurance premiums are taxable, but any employer-paid portion is not considered part of your medical expense deduction.


Types of health insurance

There are many different types of health insurance, including Medicare, Medicaid, group  plans through an employer and individual/family policies purchased directly from an insurance company. Each type is subject to different rules regarding premiums (i.e., whether or not they are taxable). Individual and family policies that are purchased directly from an insurance company (known as nongroup coverage) have been growing in popularity over recent years.


Health Care tax breaks

If you purchase your own health insurance plan, you may be able to claim certain tax breaks. First, look into whether you’re eligible for premium tax credits if your income is between 100 and 400 percent of poverty level. You can also deduct some out-of-pocket medical expenses that exceed 10 percent of your adjusted gross income (AGI). You can only do so if you itemize deductions on Schedule A, however. And don’t forget about Flexible Spending Accounts (FSAs) or Health Savings Accounts (HSAs), which allow you to set aside pre-tax dollars for out-of-pocket medical expenses like co-pays and prescriptions.


Who pays the tax?

It’s your employer that pays for most of your health insurance premiums, but as an employee, you’ll pay payroll taxes on part of those premiums. The employers’ portion is deducted from employees’ paychecks before they’re taxed, meaning it never gets taxed. The self-employed have to pay a self-employment tax (also known as SE tax) on 100% of their  premiums.


Health Insurance The breakdown on health care taxes

In 2014, health care premiums are subject to a 3.8% tax, known as Net Investment Income Tax (NIIT). The NIIT applies to individuals with Adjusted Gross Income (AGI) in excess of $200,000 and married couples filing jointly with AGI over $250,000.


Health Insurance Is it fair?

The government considers health insurance premiums a personal medical expense. In some cases, you may even be able to deduct these premiums from your taxes. The Internal Revenue Service (IRS) states that anyone. Who is paying for their own coverage must report their monthly premiums as taxable income. If you have through your employer, however, we do not consider those premiums. Part of your income and thus not taxable. If you work for yourself or receive social security benefits all of your insurance expenses are tax-free as well.


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