Can Health Insurance From Payroll Deductions Be Deducted From Federal Income Tax?

If health insurance is an employee benefit, it's often tax-deductible.
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You can only write off your medical bills if you itemize tax deductions. The rules for your health insurance premiums are a little different. If your boss takes your insurance-premium payments right out of your paycheck, the money may be tax-deductible even if you take the standard deduction. If not, itemizing is still an option.


Even if your employer handles your premiums, he may be paying them with after-tax dollars. Check your W-2 and see whether your payments are included as part of your total taxable wages. If they are, you can deduct your share of the premium cost on Schedule A as a medical expense. If they're not included, your company pays for your premiums with pre-tax dollars, then deducts it from your total taxable income. You gain the tax break without having to do anything further.


A health savings account (HSA) works like a healthcare IRA. If you set the account up with your employer, you deposit part of your pre-tax pay into the account, and interest the money earns is also tax-free. Unlike an IRA, you don't pay tax on withdrawals, as long as you spend the money on an approved medical expense. The only approved insurance you can buy with an HSA are long-term care policies, COBRA coverage after you leave your job, or insurance while unemployed. If you use the money for other premiums, the withdrawal is taxable.

Section 125

Section 125 workplace plans are also called cafeteria plans because they offer you a choice of benefits. One common choice on the menu is to let you pay your insurance premiums with pre-tax dollars, though not all employers offer the option. If your employer does give you that choice, you pay for the premiums with payroll deductions taken from pre-tax income. As with HSA contributions, you pay no tax on the money you spend on cafeteria premiums.


If you pay for insurance with after-tax dollars, you can only write it off by itemizing deductions. Track your total medical bills throughout the year, including premium costs. At year's end, calculate your adjusted gross income, take 7.5 percent of that figure and subtract it from your medical expenses. If your AGI is $50,000, 7.5 percent is $3,750: All your medical expenses above that figure are deductible on Schedule A. If your costs are only $3,000, you can't deduct any of them.

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