Understanding Health Care Costs and Tax Tips

By | March 5, 2015

Taxpayers face the health care system for the first time, and must figure out the best course forward into 2016 and 2015. Taxpayers should not feel alone as many people are struggling with open enrollment and the new ObamaCare rules. In many cases, health insurance costs are not taxable to the beneficiary, although there are exceptions. Uninsured medical expenses may be deductible to the extent of medical expenses that exceed the applicable percentage of adjusted gross income.


Taxes and Healthcare

The are number of different ways to provide coverage for health care. Employees may be fortunate to have employer-provided health insurance for the employee and his or her spouse and dependents. The cost of such insurance is not included in the employee’s income and the amount of medical expenses paid for by such insurance is not included in income.


Taxes and Employer-Provided Health Insurance

If a taxpayer has employer-provided health insurance, it is excludible from his or her income. However, an employee who is eligible to receive employer-provided health insurance but opts for a different insurance program will not receive the same tax benefit. Even if the cost is the same, the employee will not be entitled to deduct the cost of the preferred plan.


Whether the employer provides health insurance coverage—and the type of plan provided—varies. Following are typical options:

  • Traditional pay-per-service coverage.
  • HMO coverage.
  • High-deductible coverage.
  • High-deductible coverage with a Health Savings Account (HSA).
  •  No health insurance.

Each of these types of plans has different costs to the employer and potentially different results to the employee. Employees should consult with human resources to determine exactly how their income is being calculated.


Healthcare costs and net income

Generally, the cost of health insurance provided by an employer to its employees and their spouses and children is not includible in the employee’s income. Also excluded from the employee’s income is the employee’s contribution to an employer-sponsored health plan. If the employee is not covered by an employer-provided plan, employer reimbursements for the cost of employee-paid health insurance are also excluded from income.


What is High Deductible Insurance?

High-deductible insurance, as its name suggest, is insurance with a high deductible that must be paid before the insurer begins to pay medical expenses. A high-deductible health plan (HDHP) must provide for minimum deductibles and maximum out-of-pocket expense limits for self-only and family plans. These limits are adjusted for inflation each year.

In conjunction with the high-deductible insurance, the employer can open or can permit its employees to open an HSA. Contributions to an HSA are generally deductible or excludible from an individual’s income. Contributions may be made by the employer, the employee, or both.

Amounts withdrawn from an HSA for medical purposes are not included in income. The withdrawal of funds for an impermissible purpose, such as to purchase a new home, results in a penalty. The penalty is similar to that imposed on early withdrawals of money in an IRA.


Self-Paid Health Insurance and Taxes

Deductions for the cost of individually purchased health insurance are not the same as deductions available to an employer. An individual who does not have access to employer-provided health insurance can deduct health insurance premiums. However, he or she may deduct only to the extent that the amount paid for premiums, along with other medical expenses, exceeds the applicable percentage of AGI (7.5 percent through 2012, and generally 10 percent beginning in 2013). Premiums paid for health insurance, long-term care insurance, and Medicare insurance are considered medical expenses.


ObamaCare and the Health Care Exchange

For tax years ending after 2013, lower-income individuals who purchase qualified health care coverage through an American Health Benefit Exchange are entitled to a refundable income tax credit equal to the premium assistance credit amount. Eligible taxpayers must have household income between 100 percent and 400 percent of the federal poverty line (FPL). The premium assistance credit operates on a sliding scale that begins at two percent of income for taxpayers at 100 percent of the FPL and phases out at 9.5 percent of income for those at 300-400 percent of the FPL. Some ttaxpayers can have the credit paid in advance directly to the insurer, to reduce a taxpayer’s out-of-pocket premium cost.