Health insurance is more important now than ever, it’s one of the larger necessary expenses you pay every month. In 2020, the national average cost of health insurance is $456 for an individual and $1,152 for a family per month or $5,472 and $13,824 annually, respectively1. As such, it’s important we discuss how pre- and post-tax medical premiums are treated from a tax perspective.
Pre-tax premiums and how are they deducted
To pay your medical premiums with pre-tax money, you must be enrolled in your employer-sponsored health insurance plan. Many employers offer group insurance plans to assist employees at reduced rates. The premiums are lower because the pool of insurers is higher which spreads the overall risk across a larger group (less risk equals lower premiums). These pre-tax deductions are excluded from (a) federal wages (b) social security wages and (c) depending on the state, state wages. These deductions can be viewed on the employees respective W-2.
Deducting post-tax premiums
On the other hand, post-tax money is deducted on Schedule A of your federal form 1040, subject to a floor of 7.5% of your AGI. For example, if your AGI is $100,000 you can only deduct those medical expenses exceeding $7,500. So, if you paid $10,000 in medical costs over the year, you could deduct $2,500. As you can see, this is less beneficial and poses some roadblocks you wouldn’t run into if you elected to use a qualified employer provided health plan.
Eligible medical expenses
In order for medical costs to become deductible, they must be IRS approved. Examples of eligible expenses include, but are not limited to, costs for health insurance premiums; doctors; surgeons; dentists; chiropractors; psychiatrists; and psychologists.
Summary
- Pre-tax insurance premiums are not subject to the 7.5% AGI floor and are deducted directly from taxable income on your W-2.
- Post-tax insurance premiums are subject to a 7.5% AGI floor on Schedule A of your federal form 1040.
1 These averages are for non-employer plans. For example, plans purchased through the health insurance marketplace. Employer provided plans are generally lower due to, and subject to, a variety of factors.
Disclaimer: The information provided herein is intended solely for informational purposes and no person(s) or other third-party may rely upon it as financial, tax, or legal advice or use it for any other purposes. As a result, Royal Financial, and any affiliates, assume no responsibility whatsoever to readers, or any other persons for that matter, as a result of the information contained herein.