Is Health Insurance Taxable?

There are so many different options as far as fringe benefits that companies offer within their employee benefits that it can become confusing tax-wise. Your W-2 shows many of these perks so we often think they are all taxable. However, in the case of health insurance, it is not a taxable event. But as it is with all tax rules, there are exceptions. 

What Is Not Taxable?

Health benefits that pay for doctor visits, hospital stays, diagnostic testing, medications and any other medical related costs, are not taxable. The insurance premiums that your employer pays for are also not considered taxable income. If you pay a $25 co-pay, you can claim that as a medical expense on your tax return as long as your total unreimbursed medical expenses exceed 10% (2019 allowance) of your adjusted gross income. However, most people will never reach that amount of unreimbursed medical expenses.  Keep in mind, if you do plan to claim medical expenses, you will need to keep all your receipts for the year.

If your employer provides health insurance for a dependent or spouse, this is also a non-taxable event. However, if you are covering someone who is not a dependent, such as an adult child, that is then deemed taxable income. The exception to this is an adult child age 27 or younger - under the Affordable Health Act, insurance benefits extended to this adult child would not be viewed as a taxable benefit.

Other Medical-Related Tax-Free Benefits

One of the best opportunities for tax payers is the pre-tax health insurance plan. The way it works is you pay your health insurance premiums (or your portion) from pre-tax dollars. This means that the income used to pay the premiums is not taxed. This method of paying for the benefits prior to taxing is more advantageous than paying the premiums after taxes and then being allowed to claim the premiums as a medical expense on your tax return. But this isn't the only tax advantage medical insurance benefit available.

• There are also HRA (Health Reimbursement Account), HSA (Health Savings Account) and FSA (Flexible Spending Account). There are some differences in these types of accounts - one being that if your employer pays for your health insurance premiums, they can offer 1 or more of these. If you pay for your health insurance premiums, you are only eligible to open an HSA.
• An HSA is owned by you, must be used in conjunction with a high deductible health plan, money can be put in by you and by your employer, you can invest in the account and you must include the account information on your tax return. 
• An HRA is owned by your employer and only your employer can deposit money into this account.
• An FSA is also owned by your employer but both you and the employer can put money into the account.

Chandler & Knowles CPAs are committed to making sure you have all the tax advantages available and can understand the importance of making smart decisions while tax planning. Contact our friendly team to get help understanding if your health insurance is taxable or not.