To understand how health insurance is taxed, we need to organize coverage into the following groups:
Individually owned; Group; Sole proprietors and partners; Business. Then we'll discuss the taxation of disability insurance, Medicare Supplement insurance, and long-term care insurance. We'll conclude by addressing the taxation of government health progra
Taxation of Individual Policies
The premiums for individually owned accident, health, disability, or longterm care policies generally are not deductible to the individual taxpayer. However, if the taxpayer's medical expenses exceed 10% of adjusted gross income during a taxable year, any
Taxation of Group Policies
The premiums paid by a company for group accident, health, and dental coverage for its employees are generally deductible by the company as a business expense. The premiums are not taxed to the employees. The benefits are received by the employees income-
Taxation of Group Policies example
Wanda's company pays the entire premium for her group disability coverage. If Wanda became disabled, all of her benefits from this coverage would be subject to tax. However, if Wanda paid 50% of the premiums, then 50% of her benefits would be tax free. An
Taxation of Sole Proprietors and Partnerships
Self-employed persons are allowed to deduct from their gross incomes 100% of the amount they pay for health insurance (including qualified longterm care insurance). To claim this deduction, however, self-employed persons must show a net profit for the yea
Taxation of Business Policies
The premiums paid for business overhead expense insurance are deductible as a business expense whether the business is a sole proprietorship, partnership, or corporation. The proceeds of business overhead expense insurance, however, are taxable. The premi
Disability Income Insurance
Premiums paid by the insured for individually owned disability income insurance are not tax deductible. However, benefits paid in this type of situation are tax free to the insured. In situations in which the business is providing disability income covera
Medicare Supplement and Long-Term Care Insurance
Individual Medicare supplement insurance premiums are considered deductible medical expenses to the extent that the combination of premiums paid plus other unreimbursed medical expenses exceeds 10% of adjusted gross income. Benefits are considered reimbur
Chronically ill means that the individual:
is unable without substantial help from another person to perform at least two of five (or six) activities of daily living for at least 90 days (ADLs include bathing, dressing, toileting, transferring, eating, and continence; state legislatures determine
Medicare Part A Hospital Insurance is funded by
Social security payroll taxes
Medicare Part B hospital insurance is funded by
Premiums from Beneficiaries and general tax revenue
Social Security Disability Benefits
Social Security disability benefits are financed through a payroll tax. The tax rate is applied to an employee's gross wages (up to the current wage base), and an appropriate amount is deducted from the employee's wages each pay period. A like amount is c
Taxation of Social Security Benefits
Social Security benefits are generally received free of income tax. However, federal income taxes are imposed on some benefits if the taxpayer has a substantial amount of additional income. The specifics of the calculations are not important at this stage