The Difference Between Pretax and After-Tax Medical Insurance Payments

Choosing pretax or after-tax insurance affects either your taxable income or your medical deductions.

medical equipment image by Alina Isakovich from

The main difference between pretax and after-tax medical payments is the treatment of the money used to purchase your coverage. Pretax payments yield greater tax savings, but after-tax payments present more opportunities for deductions when you file your tax return. However, depending on your health and need for medical services, you might be able to get the best of both worlds.

Pretax Insurance Premiums

Many employers offer group insurance plans to employees at reduced rates. The majority of these plans are set-up as pretax deductions. If you elect coverage under your employer’s plan, your premium is deducted from your gross pay before tax is calculated on your earnings. This reduces your gross taxable wages and the tax withheld from your pay.

After-Tax Insurance Premiums

Opposite of pretax insurance payments, the money left in your paycheck after taxes are deducted is the amount available for after-tax insurance. Some employers offer supplemental insurance plans that you can purchase with after-tax dollars. You can also purchase your own insurance using your take-home pay instead of participating in group plans offered by your employer. Any insurance you purchase with your net paycheck proceeds is considered an after-tax payment.

Out-of Pocket Costs

Out-of pocket payments you make to your insurance company are generally after-tax expenses, unless you use funds from a Health Savings Account that you contributed to pretax. Out-of-pocket expenses include co-payments, prescription costs, and co-insurance amounts. Some plans require you to pay for all or a percentage of your services up front before full coverage is available. The costs you incur are applied against your insurance deductible. These payments are also categorized as out-of-pocket expenses.

Tax Deductions

The IRS allows taxpayers who itemize deductions to claim certain medical expenses. Deductible costs include those paid with after-tax dollars only. You can’t deduct any portion of pretax medical insurance payments or HSA contributions your employer deposits on your behalf. You also can’t deduct medical expenses you pay with HSA dollars because you already receive the benefit of not paying tax on the money used to fund the HSA account.

Photo Credits

  • medical equipment image by Alina Isakovich from

About the Author

With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.

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