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Is Health Insurance Taxable?

The U.S. tax code offers taxpayers myriad tax deductions that can lower taxable income and, in turn, decrease the amount paid in federal income tax. The law may allow you to deduct all or part of your health insurance premium, depending on how much you pay, your income, your employment status and how you obtained your health coverage.

  1. Employer Insurance

    • Group health insurance provided through an employer enjoys tax-exempt status. Your employer likely pays your insurance premiums from your gross earnings prior to withholding federal income tax. This could lower your annual taxable income and result in a lower tax bracket. In addition to your group health insurance, other premiums you pay through work for additional insurance, such as supplemental health, vision and dental, may be tax deductible as well.

    Private Health Insurance

    • If your employer doesn't offer health insurance, or if you prefer a different coverage plan than what's available, you must purchase an individual health policy from a private insurance company. Unfortunately, you can't deduct your private health insurance premiums on your federal income taxes unless they exceed 7.5 percent of your adjusted gross income. You can deduct the amount of money you spend on medical expenses, including premiums, that exceeds this threshold each year.

    Self-Employed Individuals

    • If you're self-employed, you don't have access to a group health insurance plan unless your spouse's employer offers coverage. In this case, you can deduct 100 percent of your health insurance premiums on your yearly income tax. Though you can't pay your premiums with tax-free money such as employer-based premiums, you can enjoy an immediate tax break without waiting until you file your income taxes by adjusting your quarterly estimated tax payments to account for the deduction.

    Health Savings Accounts

    • If you have a private health insurance plan that isn't eligible for a tax deduction, consider switching to a high-deductible health plan and opening a health savings account, or HSA. High-deductible health plans require expensive out-of-pocket costs if you file a claim, but they come with much lower premiums than traditional health insurance plans. If your policy qualifies, you can open an HSA and contribute your premium savings into the account to save for future health expenses. The IRS doesn't tax any money deposited into the account that you use for eligible medical expenses. Be aware, however, that you can't pay your health insurance premiums from your HSA, and any unqualified purchases or withdrawals from the account are subject to federal taxes and a penalty.

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