Are Health Insurance Premiums Pre-Tax?

Health insurance premiums are outpacing the inflation rate and average wage increases, growing by about 5 percent each year, according to a 2009 article in The Seattle Times. With premiums becoming increasingly unaffordable, some Americans may benefit from tax breaks that help alleviate the financial burden associated with health coverage.

Employers

• If you are an employer who offers health insurance to your employees, health insurance premiums are tax-deductible for group policies. When you pay your employees' insurance premiums, you can deduct each employee's portion of the health premium from the employee's gross pay. This also includes premiums for supplementary insurance policies, such as dental, vision or job-related accidental health benefits. You can then tax the remaining balance of each employee's earnings.

Self-Employed Individuals

• If you are self-employed, you have no access to an employer's health insurance benefits unless your spouse's employer offers family coverage. Instead, you must shop for and purchase your own health insurance policy, paying 100 percent of the premiums out of your own pocket. The IRS allows self-employed individuals to deduct health premiums on federal income taxes. You may have to wait to receive a financial break for the deduction, but it can result in significant savings on your annual tax bill. You can, however, adjust the amount of estimated tax payments you pay the IRS each quarter to account for the deduction, but be careful not to overestimate the value of your deduction, thus underpaying Uncle Sam. Failing to pay enough estimated tax to the IRS can result in fines and penalties.

The Affordable Care Act

• The Affordable Care Act, a health reform bill signed into law in 2010, implements multiple tax provisions concerning health insurance premiums. Between 2010 and 2013, the law provides a tax credit for small businesses that pay at least half of employee health premiums. The credit is worth up to 35 percent of the employer's contributions until 2014, when the credit increases to 50 percent. Also beginning in 2014, low- to middle-income taxpayers who purchase individual health insurance due to a lack of available coverage from an employer can claim a significant tax credit. The credit will be available on a sliding scale to help families afford private health insurance.

Until 2014

• Until 2014, if you purchase your own health insurance plan and are not self-employed for tax purposes, you cannot pay health care premiums with pre-tax funds. Instead, you can total the cost of your health premiums and combine the total with any other medical expenses you incur throughout the year. You may deduct any portion of your total medical expenses and health care premiums that exceeds 7.5 percent of your adjusted gross income for the tax year. Another way to achieve a tax break is by choosing a high-deductible health insurance plan for you and your family. Qualifying high-deductible policies allow you to open a health savings account, or HSA, to which you can contribute funds tax-free. Your overall premium will be lower than with traditional insurance, and you can pay most medical expenses except your health premiums directly from the HSA completely tax-free.