Your income taxes may be affected by two aspects of your
health insurance plan: the premiums and the benefits. Many variables impact the
tax treatment of your health insurance premiums and benefits.
Employer-paid premiums are excluded from income
In general, you can exclude from your income for tax purposes any health
insurance premiums (including Medicare) paid by your employer. The premiums can
be for insurance covering you, your spouse, and any dependents. This rule holds
true regardless of whether premiums are for an employer-sponsored group policy
or an individual policy. You can even exclude premiums your employer pays when
you are laid off from your job.
Employer reimbursement of premiums is typically not taxable
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.
Self-paid premiums are typically not deductible
The deductibility of health insurance premiums follows the rules for deducting
medical expenses. In most cases, the premiums you pay on an individual health
insurance policy will not be deductible. However, there are a few exceptions. If
you itemize deductions and your unreimbursed medical expenses exceed 7.5 percent
of your adjusted gross income (AGI) in any tax year, you may deduct the amount
by which your unreimbursed medical expenses exceed this 7.5 percent threshold.
Unreimbursed medical expenses include premiums paid for major medical, hospital,
surgical, and physician's expense insurance, and amounts paid out of your pocket
for treatment not covered by your health insurance.
The special rules for the self-employed
In addition to the general rule of deducting premiums as medical expenses,
self-employed individuals can 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. The definition of
self-employed individuals includes partners and 2% S corporation shareholders.
If you meet the definition of a self-employed individual, you can deduct the
following percentages of premiums for insuring yourself, your spouse, and your