For some individuals, medical insurance is one of their largest monthly expenses, prompting them to ask what medical expenditures are tax-deductible in order to reduce their charge. It can be confusing to figure out what is and isn’t taxable, especially when it comes to something as important as your health.
We’re here to help clear things up. In this article, we’ll answer the question, “Is health insurance taxable?” and provide some tips on how to reduce your tax bill.
Is health insurance taxable? Health insurance is not taxable. Employer-paid health insurance premiums are not taxed at the federal or state level. The part of expenses that employees pay is generally excluded from taxable income as well.
Most employees’ tax bills are lowered by excluding premiums, resulting in a lower after-tax cost of coverage.
Is Health Insurance Taxable?
For many Americans, healthcare insurance is one of their most significant monthly expenditures, which may lead them to question if medical expenses are deductible to lower their premium. As healthcare costs continue to rise, some customers seek tax breaks on their health insurance premiums in order for them to decrease their expenditures.
Health insurance premiums are the amount paid upfront to keep an insurance policy active, have been steadily increasing as healthcare costs have increased in the United States. If you have health insurance through your employer, your premiums are likely to be tax-free already.
If your premiums are paid via a payroll deduction plan, they are almost certainly pre-tax dollars; therefore you would not be permitted to claim a year-end tax credit.
However, if your total healthcare expenditures for the year are substantial enough, you may still be able to deduct them. Self-employed individuals might be able to claim health insurance premiums as a deduction if they fulfill specific requirements.
If an employer pays the cost of the health insurance plan for his/her employees (including a spouse and dependents), the employer’s payments are not wages and are not subject to social security, Medicare, or FUTA taxes, nor is there any federal income tax withholding.
In general, this exclusion applies to qualified long-term care insurance policies. The cost of health insurance benefits, on the other hand, must be included in the wages of S corporation employees who own more than two percent of the firm (two percent shareholders).
Calculating Taxes On Health Insurance (Premiums)
For the 2021 and 2022 tax years, you may deduct qualified unreimbursed healthcare costs you paid for yourself, your spouse, or your dependents if they exceed 7.5% of your AGI).
AGI is the result of your gross income being adjusted by a certain amount. It includes all of your sources of income, minus any deductions that you may take from your earnings, such as retirement plan contributions and student loan interest payments, as well as losses incurred from the sale or exchange of property.
Premiums paid for a health insurance policy and any out-of-pocket expenses for things like doctor visits, operations, dental care, vision care, and mental healthcare are all eligible. You may only claim the costs that exceed 7.5% of your AGI.
Example: Your AGI for the year is $50,000. 7.5% of that amount is $3,750, so any qualified expenses exceeding that amount are deductible. If your total medical expenses were $6,000, you’d be able to deduct $2,250 from your taxable income. Don’t include reimbursed expenses, such as premium tax credits, when doing the calculation.
How To File Taxable Health Insurance On Your Federal Taxes?
If you had job-based health coverage
You may get one of these from your employer or insurance company depending on the type of job-based coverage you had (COBRA or retiree coverage):
- Form 1095-B, Health Coverage
- Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.
If you receive Form 1095-B or Form 1095-C
- You should have it by mid-March.
- Read Parts II and IV on Form 1095-B or Parts II and III on Form 1095-C to find information about:
- Your job-based insurance offer and 2021 coverage
- Covered individuals and the months they had coverage
- More about Forms 1095-B and 1095-C from the IRS.
If you had other health coverage
If you had Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), or another source of coverage, depending on the insurance you had, you may receive Form 1095-B, Health Coverage.
If you receive Form 1095-B
- You should have it by mid-March.
- Read Parts III and IV to find information about:
- Your 2021 insurance coverage
- Covered individuals and the months they had coverage
State Taxes On Health Insurance
Certain states have their own unique health insurance mandate, which requires you to obtain qualifying health coverage or pay a fine with your state taxes. If you live in a state that demands you get health insurance but don’t have it, you might be fined.
Each month of the year, you must have minimum essential coverage (MEC) in order to avoid a penalty.
- Yourself
- Your spouse or domestic partner
- Your dependents
In general, a “provider tax,” sometimes known as a “fee” or an “assessment,” is a state law that allows the collection of money from certain sorts of providers. It is most commonly used as a way to generate new in-state money and match it with federal funds so that the state gains additional federal Medicaid dollars.
In the majority of situations, the tax expenses are reimbursed to providers by an increase in Medicaid payments for their patient care and services. States may also charge a tax on most kinds of providers and services and designate or dedicate the money for any state objective beyond Medicaid.
Conclusion
Although employer-paid health insurance premiums are not taxed, the part of expenses that employees pay is generally excluded from taxable income. This makes it more affordable for employees to have health insurance and helps to keep costs down. Thanks for reading!
