Comparing Group/Individual Health Insurance Tax Liability

Health insurance tax deductions have eased the burden of health insurance payments. The US government has deemed that health insurance is proving to be expensive for most families. At the same time, medical costs are rising, which makes it impossible to skirt the issue of health insurance. The solution adopted is to lower the payments by introducing various health insurance tax deductions. These deductions are available for both individual and group plans, and employer-based or personal plans. Here we take a look at them.

Deductions Available for Certain Expenses

Regarding group and individual health insurance in the United States, there are deductions that are available to taxpayers, depending on the amount of medical expenses incurred and who is paying the insurance. Individual health insurance plans are purchased and paid for by individuals outside of an employer-sponsored plan. The premiums used to pay for these health insurance plans are after-tax dollars that are not subject to taxation. Since individual health insurance is considered to be a personal expense of the buyer, no deduction is available. The exception to this rule is the premiums paid for a qualified long-term care insurance policy purchase on or after January 1, 1997.

Group Health Insurance Plans

Group health insurance plans are provided by employers to their employees. The employer that offers this benefit to its employees is permitted to deduct the portion of the premium that it pays in behalf of its employees as an incentive.  In a noncontributory plan where an employer pays 100 percent of the premium, they are permitted to deduct 100 percent of the premium paid. In a contributory plan where the employee contributes a portion of the premium, the employer may only deduct the portion that they contribute.

High Deductible Health Plans/Health Savings Accounts

Additionally, an employee or individual that signs up for a high deductible health plan (HDHP) may deduct the contributions made to a health savings account (HSA). An HSA is an account that is used by a participant in a HDHP in order to meet certain qualified or unreimbursed medical expenses, including deductibles, coinsurance, doctor’s office fees and other medical expenses. In order to be permitted to set up an HSA, the individual or group health insurance plan participant must have a deductible of $1,150 as an individual or $2,300 as a family, as of 2009.  The maximum contribution that can be made is $3,000 for an individual and $5,950 for a family, also in 2009.

Deduction for Unreimbursed Medical Expenses

Participants in an employer-sponsored group health insurance plan as well as individual who purchase their own health insurance plans are permitted to deduct any unreimbursed medical expenses that exceed 7.5 percent of their adjusted gross income (AGI). 

For example, an individual or family with an AGI of $100,000 incurs $10,000 of unreimbursed medical expenses for the year. Under the rule, the individual or family, at tax time, may deduct $2,500 from their taxes, or $10,000 - $7,500 = $2,500.

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