Are Health Insurance Benefits Considered Income by the IRS?

Health insurance is not taxable income, even if your employer pays for it. Under the Affordable Care Act, the amount your employer spends on your premiums appears on your W-2s, but it still isn't income. When you receive benefits from your insurance policy, however, they may be taxable.

Reimbursement

If your benefits do nothing but pay for doctor bills, prescriptions and hospital stays, don't worry -- those payments are not taxable. Keep track of any related out-of-pocket expenses if you plan to claim a medical-expense deduction. If your insurance pays for a $2,000 high-tech exam, for example, you can't claim that as a deduction. But if you paid a $40 co-payment, you can write that off if you have enough other deductions to make itemizing a better deal than taking the standard deduction. As of 2013, medical expenses can be deducted to the extent they exceed 10 percent of your adjusted gross income if you are 65 or younger (7.5 percent if you are older).

Who Pays?

If your insurance does more than just reimburse you -- paying benefits when you're disabled or sick, for instance -- the benefits may be taxable, depending on who pays your premiums. When you pay for the insurance policy, your benefits are tax-free. When your employer pays, the benefits are taxable. If it's a split -- your employer pays 60 percent of the premiums, say -- then 60 percent of the benefits are taxable. Your employer should factor that into your withholding.

Dependents

When you take out workplace coverage to get health benefits for your children or your spouse, that insurance isn't taxable income either. The exception is if it's someone who isn't a dependent or a spouse, such as an adult child. In that case, your coverage is a fringe benefit and part of your taxable income. One effect of the Affordable Care Act is that if you cover an adult child younger than 27, the coverage isn't subject to tax.

Disability

Disability payments, like other insurance benefits, are taxable if your employer pays for the policy. You pay tax on the benefits until you retire. At that point, tax law treats it as a retirement annuity instead of health benefits. If your disability or other health problems require long-term care, money you get from a long-term care insurance policy is usually tax-free. If there's a cash surrender value on the policy, your benefits are taxable.

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About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

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