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 should in no way be classified as income. That being said, it is important to remember that any benefits you have received due to you health insurance policy may be taxable. Understanding how and when this money can be taxed can save you a number of financial headaches over the long term.
While traditional health insurance benefits are usually not considered taxable income, you may pay tax on related benefits your employer pays for, like financial or disability benefits.
Personal Medical Expense Reimbursement
If your benefits do nothing but pay for doctor bills, prescriptions and hospital stays, then don't worry – those payments are not taxable. Even though your health insurance is essentially paying for these critical services, this will in no way be considered part of your annual income. With that in mind, 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. However, 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. Medical expenses can be deducted to the extent they exceed 7.5 percent of your adjusted gross income for the 2018 tax year, and this threshold rises to 10 percent for 2019.
Who Pays for Your Policy?
If your insurance does more than just reimburse you – for example, if you receive financial benefits when you are temporarily disabled or sick, for instance – these benefits might indeed be taxable. The primary factor decided who the tax burden falls on at this point is who is currently paying 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, for example – then 60 percent of the benefits are taxable. Your employer should factor that into your withholding.
Health Insurance for 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.
Taxes on Disability Payments
Disability payments, like other forms of insurance benefits, are only taxable if your employer pays for the policy. You will likely pay tax on these 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.
- Internal Revenue Service: Publication 525 (2018), Taxable and Nontaxable Income
- IRS: Publication 502 (2018), Medical and Dental Expenses
- IRS: Affordable Care Act Tax Provisions
- University of Wisconsin: Imputed Income and Health Insurance Benefits
- Bankrate: Spent a Lot on Medical Care? Those Costs May Be Deductible
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.