The health insurance premiums you pay for yourself and other family members is a potential tax write-off. When your employer reimburses you for some or all of the costs, however, tax laws might prohibit you from taking a deduction. But because your eligibility to write off health insurance premiums depends on how you're reimbursed, as well as other factors, a basic understanding of the rules can help you figure out whether to take the write-off.
Taxable Insurance Reimbursements
To deduct your health insurance premiums, the reimbursement your employer provides must be taxable. In other words, if your employer includes the reimbursements on your W-2, it means the payments are taxable. As a result, the reimbursements must show up on your return and the tax is calculated in the same way that it is on your wages and other income. The good news, however, is that this also means you can deduct the health insurance premiums you were reimbursed for.
Tax-Free Insurance Reimbursements
If your employer issues payments through a health reimbursement arrangement, or HRA, the payments aren't taxable to you – meaning you won't see them reported as wages on your W-2. Unfortunately, this type of tax-free reimbursement isn't deductible. The reason is because receiving a tax-free reimbursement is like taking a deduction without having to report it on your return. Since you don't pay tax on this money to begin with, taking the deduction would double your tax savings for the same expense -- which is generally not allowed under the tax laws.
Itemize Insurance Premiums
When your reimbursement is taxable and eligible for a deduction, you won't save any money in tax unless you choose to itemize on Schedule A – the only form that allows for a medical expense deduction. But itemizing is only beneficial if the total amount of deductible expenses you report, including your health insurance costs, gives you a larger write-off than the standard deduction for your filing status. If your standard deduction is larger, you still need to report the reimbursement as income on your return despite not taking a deduction for it.
Deduction Is Reduced
Another issue to contend with even if you normally itemize is the adjusted gross income, or AGI, reduction that itemized medical expenses are limited by. Whenever you itemize, you have to reduce the sum of your eligible medical expenses by 10 percent of the AGI reported on your return to arrive at the amount you can actually deduct. For example, if you receive a taxable reimbursement that covers $12,000 in health insurance premiums and your AGI is $100,000, reducing the expenses by 10 percent of your AGI means that only $2,000 of the $12,000 is actually deductible.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.