Can I Take a Deduction for Pretax Health Dollars?

Your employer subtracts pretax deductions from your total income to give you the best result.
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Order makes a difference when you’re calculating taxes. Your employer’s got your back by allowing you to purchase health insurance with pretax dollars. It subtracts monthly health insurance payments from your paycheck before federal income taxes. With only the reduced income taxed, you get a break. But you don’t get two breaks. You can’t take a deduction for your pretax health dollars when you file your tax return with the Internal Revenue Service.

Pretax Health Dollars

When your employer allows you to claim your health insurance premiums before taxes, it reduces your total income by that dollar amount. Your Form W-2 reporting your total income to the IRS doesn’t include your pretax health dollars in the total income you received for the tax year. The total figure shows in your Social Security and Medicare wages because you pay these taxes on your pretax health insurance premiums.

Deducting Health Expenses

Health expense calculations for your income taxes are subject to a limitation of 7.5 percent of your adjusted gross income. In other words, only health expenses in excess of 7.5 percent of your adjusted gross income count as a deduction. Many tax filers have no deductible expenses because they don’t meet the 7.5 percent limitation. You can include medical insurance premiums as medical expenses for calculating your totals for your Form 1040 individual income tax return -- unless you pay your medical insurance premiums with pretax dollars. Paying the premiums pretax gives you a better tax break. You’ll have to have more than 7.5 percent of your adjusted gross income without the medical insurance premiums to take a deduction if you use pretax dollars for medical coverage.

Other Exclusions

You can’t include all medical insurance expenses in health expenses, even if they aren’t pretax deductions. The IRS doesn’t allow life insurance premiums, payment for loss of earnings, loss of limb coverage or premiums for insurance providing a weekly income while you’re off work. Nor can you count medical payments coverage costs from your automobile insurance policy. You can’t include any health insurance premiums you pay with retirement funds using tax-free distributions either.

Insurance Coverage

When you’re accumulating medical expenses for subtraction on your federal income taxes, you can’t include reimbursed expenses. Any items your insurer pays don’t count in your total medical expense. Keep your explanation of benefits forms from your insurer so you can determine what portion you paid that you can deduct. You might even receive more back from your medical insurer than your expenses. If your employer paid all or part of your medical insurance premiums, the IRS expects you to claim any excess reimbursement as income on your tax return.

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