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Taxation of Health Insurance

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 income
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 dependents:

2001 60%
2002 70%
2003 and thereafter 100%




Please Note: The information contained in this Web site is provided solely as a source of general information and resource. It is a not a statement of contract and coverage may not apply in all areas or circumstances. For a complete description of coverages, always read the insurance policy, including all endorsements
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Copyright © 2005 Oleg Skurskiy Authorized Independent Agent, CA License 0E50389