2

My employer offers insurance coverage, pays a substantial amount for me, but pays nothing for my spouse or my children. The difference in cost is around $127/month for myself and $1,330/month if I want to insure the entire family.

To save money, we're going with private insurance for my wife and the kids, which costs around $600/month.

My questions is whether or not I can use the cost of the premiums for my wife and kids ($600/month) as an out of pocket medical expense or some other deduction.

I've read some on the topic, and it sounded like I might be able to because my employer doesn't subsidize their insurance.

3

You can deduct what you pay for your own and your family's health insurance regardless of whether it is subsidized by your employer or not, as well as all other medical and dental expenses for your family, as an itemized deduction on Schedule A of Form 1040, but only to the extent that the total exceeds 7.5% of your Adjusted Gross Income (AGI) (10% on tax returns for year 2013 onwards). As pointed out in KeithB's comment, you cannot deduct any health insurance premium (or other medical expense) that was paid for out of pre-tax dollars, nor indeed can you deduct any medical expense to the extent that it was paid for by the insurance company directly to hospital or doctor (or reimbursed to you) for a covered expense; e.g. if the insurance company reimbursed you $72 for a claim for a doctor's visit for which you paid $100 to the doctor, only $28 goes on Schedule A to be added to the amount that you will be comparing to the 7.5% of AGI threshold, and the $72 is not income to you that needs to be reported on Form 1040. Depending on other items on Schedule A, your total itemized deductions might not exceed the standard deduction, in which case you will likely choose to use the standard deduction. In this case, you "lose" the deduction for medical expenses as well as all other expenses deductible on Schedule A.

Summary of some of the discussions in the comments Health care insurance premiums cannot be paid for from HSA accounts (IRS Pub 969, page 8, column 2, near the bottom) though there are some exceptions. Nor can health care insurance premiums be paid from an FSA account (IRS Pub 969, page 17, column 1, near the top).

If you have a business on the side and file a Schedule C as a self-employed person, you can buy medical insurance for that business's employees (and their families too, if you like) as an employment benefit, and pay for it out of the income of the Schedule C business, (thus saving on taxes). But be aware that if you have employees other than yourself in the side business, they would need to be covered by the same policy too. You can even decide to pay all medical expenses of your employees and their families too (no 7.5% limitation there!) as an employment benefit but again, you cannot discriminate against other employees (if any) of the Schedule C business in this matter. Of course, all this money that reduced your Schedule C income does not go on Schedule A at all.

If your employer permits your family to be covered under its health insurance plan (for a cost, of course), check whether you are allowed to pay for the insurance with pre-tax dollars. The private (non-Schedule C) insurance would, of course, be paid for with post-tax dollars. I would doubt that you would be able to save enough money on taxes to make up the difference between $1330/month and $600/month, but it might also be that the private insurance policy covers a lot less than your employer's policy does. As a rule of thumb, group insurance through an employer can be expected to offer better coverage than privately purchased insurance. Whether the added coverage is worth the additional cost is a different matter. But while considering this matter, keep in mind that privately purchased insurance is not always guaranteed to be renewable, and a company might decline to renew a policy if there were a large number of claims. A replacement policy might not cover pre-existing conditions for some time (six months? a year?) or maybe even permanently. So, do consider these aspects as well. Of course, an employer can also change health insurance plans or drop them entirely as an employment benefit (or you might quit and go work for a different company), but as long as the employer's health plan is in existence, you (and continuing members of your family) cannot be discriminated against and denied coverage under the employer's plan.

  • This is very good and thorough. A point of clarification. In the first sentence, it should be clarified that it applies to only post-tax expenses, not anything taken out by your employer pretax. So pretax premiums are not deductible, but post-tax copays are. – KeithB May 2 '12 at 17:00
  • Thanks. I added the point about only post-tax and non-reimbursed expenses going on Schedule A. – Dilip Sarwate May 2 '12 at 18:09
  • the 7.5% becomes 10% limit next year – littleadv May 2 '12 at 18:55
  • I'm not sure. I think 2012 returns, but I haven't seen anything definitive from the IRS yet... – littleadv May 2 '12 at 19:10
  • Aren't insurance premiums paid outside an employer's plan payable from a flex account? That should be good for $5000 worth of expense being pulled pretax. Until congress screws it up. – JoeTaxpayer May 3 '12 at 2:01

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.