Employer health insurance is federally tax deductible.
The combination of federal income taxes and health insurance premiums can absorb a big portion of your income, leaving you with a fraction of your original earnings to live on. Fortunately, the Internal Revenue Service recognizes the high cost of health insurance and allows taxpayers to deduct all or part of monthly insurance premiums from federal income taxes.
Private Health Insurance
If you pay for health insurance through an employer's group insurance plan, the IRS will allow you to deduct 100 percent of the cost of your out-of-pocket premiums from your federal income taxes. The deduction is usually advanced to you throughout the year, as many employers automatically deduct the cost of your health insurance premium from your paycheck before withholding federal taxes. On the other hand, if you purchase an individual health insurance plan on your own, the IRS does not afford you the same tax deduction. You can, however, deduct all qualifying health expenses, including your insurance premiums, which exceed 7.5 percent of your adjusted gross income. In other words, if you pay $500 per month for your individual health insurance and have an annual adjusted gross income of $30,000, you can deduct $3,750 assuming you had no other health-related expenses.
Exception
The IRS may allow you to deduct 100 percent of your individual health insurance plan premiums if you are self-employed. According to IRS Publication 535, any health and dental insurance premiums you pay for yourself and your dependents as a self-employed individual are federally tax deductible as business expenses. This includes premiums you pay for dependent and non-dependent children under age 27. To qualify for the deduction, you must have filed a Schedule C, Schedule C-EZ, Schedule F, Schedule K-1 or Schedule SE for the tax year or else have received wages reported on a W-2 from an S corporation of which you hold 2 percent or more of outstanding stocks.
Small Business Tax Relief
The Affordable Care Act of 2010 introduced a tax credit for qualifying small businesses that offer health insurance to their employees. Under the law, the IRS will allow a tax credit of up to 35 percent for the employer's contribution to health insurance premiums for employees. Only businesses with 25 or fewer full-time-equivalent employees will qualify for the credit, and the average annual wages of full-time employees cannot exceed $50,000 each. Businesses that qualify for the small business health insurance tax credit can expect the maximum credit to increase to 50 percent of out-of-pocket costs in 2014.
Considerations
The Affordable Care Act will become fully effective in January 2014, at which time Americans will have expanded access to health insurance tax benefits. Many individuals who purchase private health insurance due to a lack of access to an employer's group plan will receive significant tax credits to help reduce monthly insurance premiums. To qualify for the tax credits, your household income must fall between 100 and 400 percent of the federal poverty level.
Tags: health insurance, health insurance, insurance premiums, federal income, federal income taxes
