IRS Deductions for Pretax Health Insurance Premiums

The Internal Revenue Code allows several forms of deductions for pretax health insurance premiums paid by businesses and individuals. There are also other forms of tax reduction relating to health insurance premiums available, such as Health Savings Accounts. Health premiums in the United States are a matter of considerable public policy debate; the 2010 passage of the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act will provide considerable changes for the future of health premiums and the tax consequences thereof.

General

• In general, the Internal Revenue Service allows businesses a deduction for "group hospitalization and medical insurance for employees, including long-term care insurance." Not only may these costs be deducted from gross income, but the amounts of premium are also not typically subject to wage and benefit-based taxes, such as Social Security and Medicare surcharges.

Self-Employed Individuals

• Self-employed taxpayers typically cannot deduct the cost of their health insurance premiums as a business expense. These taxpayers are, however, allowed to deduct the cost of health insurance premiums directly against their gross income from all sources on the United States Individual Income Tax Return, Form 1040. Limitations of this deduction exist, however. Most significantly, the deduction cannot exceed the net income from the self-employed person's business after adjusting for the tax deductions available for self-employment tax and retirement plans. In 2010 only, many self-employed taxpayers will be eligible to deduct the cost of their health insurance premiums directly against business income.

Itemized Deduction

• All individual taxpayers are entitled to deduct medical expenses, including health-insurance premiums, as an itemized deduction on Schedule A of Form 1040. Such a deduction, however, is extremely limited. Although a large range of medical expenses are deductible, the deduction for aggregate medical costs is reduced by an amount equal to 7.5 percent of the taxpayer's adjusted gross income. In addition, not only are total itemized deductions subject to further limitation, but the majority of Americans also do not itemize deductions on their income tax returns.

Health Savings Accounts

• Health Savings Accounts (HSAs) are often considered IRAs for medical costs. These plans allow taxpayers with qualifying high-deductible health insurance policies to deposit money on a pre-tax basis. The contributions to the account grow tax-deferred and are typically taxed at distribution, when they are used to pay for qualified medical expenditures. HSAs are subject to annual contribution limitations.

Future

• The Patient Protection and Affordable Care Act Health Care Act and the Education Reconciliation Act of 2010 will substantially alter the landscape of health insurance in the United States. Among numerous provisions, the bills provide for government subsidization of health insurance premiums, incentives for businesses to provide premiums, additional taxes on individuals failing to obtain health insurance and multiple taxes and fees to finance the bills.