Medical premiums are notoriously expensive, but what if they were tax-deductible? This article breaks down the difference between deducting medical expenses pre-tax and after. It’s important to know which one is right for you!
What are Pre-Tax Medical Premiums?
Medical insurance can be costly. So it might seem like a big bonus that some of your yearly spending on healthcare may qualify as an eligible health care expense for federal income taxes in certain situations.
You pay a pre-tax medical premium before deductions for income tax or payroll taxes. Pre-tax medical premiums provide savings ranging from 30 up to 50%. Employer-sponsored plans include:
- Primary medical coverage purchased through your employer: You pay the premium for primary medical coverage before taxes.
- Supplemental/voluntary coverage purchased through your employer: You pay the premium for supplemental/voluntary coverage before taxes.
- Healthcare spending account contributions, such as FSAs: The contributions to a healthcare spending account are deducted from your paycheck before taxes.
- Employer-sponsored reimbursements for medical premiums (see below): The reimbursement for your healthcare premiums, if provided by your employer, are deducted from your paycheck before taxes.
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After-Tax Medical Premiums
Suppose your employer does not offer a pre-tax health insurance plan, or you do not want to participate in the pre-tax plan. In that case, you can deduct your medical premiums on an after-tax basis. After-tax premiums include the following:
- Any major medical coverage purchased on your own:
- A self-employed individual’s health insurance premiums.
- The amount you contribute to your retirement account, including an IRA or SEP plan.
- Supplemental/voluntary coverage purchased on your own.
Some people might do this if they want to drop coverage and enroll in another plan at any point during the year. You cannot drop the coverage paid with pre-tax dollars until the end of December. So you must wait for the next open enrollment period before signing up for a new plan again.
What are Individual Retirement Arrangements (IRAs)?
SEP Plan FAQs
Tax Deductions for After-Tax Medical Premiums
While after-tax medical premiums offer some tax benefits, you can still deduct these expenses on your Schedule A when filing taxes. Additionally, most self-employed taxpayers eligible to pay their health insurance premiums can file an additional deduction on Schedule 1 for Line 16 of their form 1040.
HRAs Delivered Pre-Tax Benefits with After-Tax Flexibility
HRA considers reimbursements for premiums as pre-tax but functions differently from other pre-tax plans.
You can purchase a plan on the individual insurance exchange by using after-tax dollars. Your employer will reimburse you for premiums and other out-of-pocket medical expenses up to a pre-defined amount (usually monthly or annually). The reimbursement is made pre-tax, so payroll taxes, as well as income, are avoided.
The benefits of an after-tax plan are better than your employer’s pre-tax offerings. You can choose from many different plans and carriers, often with a wider variety, to offer you the best possible deal for what you want or need. If it doesn’t work out at one job, drop the plan or take it with you when changing jobs!
Final Words
It’s important to know how your pre-tax and after-tax medical premiums work. This article has given you a brief overview. Still, many other factors affect the total cost of your health insurance plan. We’re happy to help answer any questions you might have about this topic or provide further explanation on what these terms mean concerning an employer-sponsored healthcare plan. Contact us today!