Amendments to the tax code are among the many changes brought about by the Patient Protection and Affordable Care Act (PPACA). Employers and their advisors may have questions about whose expenses are deductible, which tax credits they may claim, and what the new regulations entail for grandfathered plans. Individuals may be curious about how HSA distributions are taxed or whether benefits from a personal health insurance policy are taxable. If you have any of these or other queries, don’t worry; we have the well-researched answers you’re looking for.
Are premiums paid for personal health insurance deductible as medical expenses?
Premiums paid for medical care insurance, including as hospital, surgery, and medical expenditure reimbursement coverage, are deductible as a medical expense to the extent that the amount exceeds 10% of a taxpayer’s adjusted gross income when added to all other unreimbursed medical expenses (7.5 percent for tax years beginning before 2013). For alternative minimum tax purposes, the threshold is also 10%.
For tax years beginning January 1, 2013, the Patient Protection and Affordable Care Act increased the threshold to ten percent of a taxpayer’s adjusted gross income for taxpayers under the age of sixty-five. From 2013 to 2016, taxpayers over the age of 65 will be temporarily exempt from this provision, and the deductibility threshold for these taxpayers will stay at 7.5 percent.
Unless a taxpayer itemizes his or her deductions, no deduction for medical care premiums or other medical expenses is allowed. Medical expenses deductible under IRC Section 213 are not subject to the itemized deduction limit for certain high-income persons.
Only medical care insurance premiums are tax deductible as a medical expense. Non-medical benefits premiums, such as disability income, accidental death and dismemberment, and premium waivers under a life insurance policy, are not deductible.
Amounts spent for any qualified long-term care insurance contract or qualified long-term care services fall under the definition of medical care and are thus eligible for an income tax deduction, subject to certain limitations.
Compulsory contributions to a state disability benefits fund are deductible as taxes rather than medical expenses. Employee contributions to a state-mandated alternative company plan that provides disability insurance are nondeductible personal costs.
If a policy includes both medical and non-medical benefits, the medical portion of the premium can be deducted only if the medical fee is appropriate in relation to the overall premium and is specified separately in the policy or a statement provided by the insurance provider.
Similarly, because the deduction is limited to expenses incurred by the taxpayer, his or her spouse, and dependents, no deduction is allowed where a premium includes medical care for others (as in automobile insurance) without specifying the portion applicable to the taxpayer, spouse, and dependents separately.
Even if the benefits are stated amounts that would be paid regardless of the actual amount of expense incurred, premiums qualify as medical care premiums if a policy solely offers indemnity for hospital and surgical expenses. Premiums paid for a hospital insurance policy that pays a stated amount for each week an insured is hospitalized, up to a certain number of weeks, regardless of whether the insured receives additional reimbursement payments, do not qualify as medical care premiums and are thus not deductible.
Premiums for a stand-alone critical illness coverage are not deductible because they are considered capital outlays.
Employee contributions to a plan that provides that employees absent from work due to illness will be compensated a percentage of wages earned by co-workers on that day will also be disallowed.
Premiums for a policy that reimburses the cost of prescription medications are tax deductible as medical insurance premiums.
Medicare premiums paid under the supplementary medical insurance or prescription medication programs by people aged 65 and higher are deductible as medical care insurance premiums. Employees and self-employed people who pay Medicare taxes for basic hospital insurance are not eligible for a deduction.
Premiums paid before the taxpayer turns sixty-five for insurance that covers medical care for the taxpayer, his or her spouse, and dependents after the taxpayer turns sixty-five are deductible if they are paid on a level-premium basis for ten years or more or until the taxpayer turns sixty-five, but not for less than five years.
Payments made to an institution for the provision of lifetime care are deductible in the year paid if the payments are properly allocable to medical care, even if the care may be delivered in the future or may not be provided at all. The IRS has emphasized that its rules should not be construed to allow a current deduction for payments for future medical care, including medical insurance, supplied beyond the current tax year in instances where future lifelong care is not of the type covered by these rulings.
May an employer deduct as a business expense the cost of premiums paid for accident and health insurance for employees?
All premiums paid for health insurance for one or more employees can normally be deducted as a business expenditure by an employer. This covers medical expense insurance premiums. Employees, their spouses, and dependents are covered for dismemberment and loss of sight, as well as disability income and accidental death coverage.
Whether coverage is given under a group policy or individual policies, premiums are deductible by the employer. The deduction for health insurance is only allowed if the benefits are paid to employees or their beneficiaries; if the benefits are paid to the employer, the deduction is not allowed. The premium is deductible when an employer’s spouse is a genuine employee and the employer is insured as a family member. Whether or not commission salespeople are employees, a company can deduct the premiums it pays on group hospitalization insurance. Premiums must be considered supplementary pay for covered personnel.
The deduction for amounts paid or accrued may be limited if a contribution is considered made to a fund that is part of an employer plan to provide the benefit.
If filing a claim is necessary to establish the employer’s liability for payment, an accrual basis employer that provides medical benefits to employees directly rather than through insurance or an intermediary fund may not deduct amounts estimated to be necessary to pay for medical care provided during the year but for which claims have not been filed with the employer by the end of the year.
What credit is available for small employers for employee health insurance expenses?
A credit is available for an eligible small employer’s employee health insurance expenses for taxable years beginning after December 31, 2009, if the employer provides health insurance to its employees.
A small employer is defined as one with less than twenty-five full-time employees whose average yearly pay do not exceed $50,000. (in 2010, 2011, 2012 and 2013; the amount is indexed thereafter).
An employer must have a contribution mechanism in place for each employee who enrolls in the company’s health plan through an exchange, requiring the employer to make a non-elective contribution equivalent to a uniform percentage of the premium cost, not less than 50%.
The credit is equal to 50 percent, or 35 percent in the case of tax exempts, of the lesser of (1) the aggregate amount of non-elective contributions made by the employer on behalf of its employees for health insurance premiums for health plans offered by the employer through an exchange, or (2) the aggregate amount of non-elective contributions the employer would have made if the employer had not made the contributions.
For the years 2010, 2011, 2012, and 2013, the following adjustments to the credit amount apply:
(1)The credit proportion has been decreased to 35% (or 25% in the case of tax exempts);
(2)The amount under (1) is calculated using non-elective contributions for health insurance premiums paid, and there is no necessity to use an exchange; and
(3)The amount under (2) is decided by the state small group market’s average premium.
Under the Patient Protection and Affordable Care Act, small businesses will have exclusive access to an increased Small Business Healthcare Tax Credit in 2014. (PPACA). For qualifying firms with low- to moderate-wage workers, this tax credit can cover up to 50% of the employer contribution toward premium costs.
Are benefits received under a personal health insurance policy taxable income?
Personal health insurance payouts are normally tax-free in their whole. This covers disability benefits, dismemberment and blindness benefits, critical illness benefits, and payment for hospital, surgery, and other medical expenses. There is no limit to the amount of benefits that can be received tax-free under personally funded health insurance or an arrangement that has the effect of accident or health insurance, including the amount of disability income. However, at least one court has ruled that the IRC Section 104(a)(3) exception does not apply when a taxpayer’s insurance claims were not filed in good faith and were not based on a genuine illness or injury.
As death proceeds of life insurance, the accidental death payment under a health insurance policy may be tax-free to a beneficiary. Disability benefits earned under no fault insurance for a loss of income or earning capacity are deductible from gross income. An insured whose policies were transferred through a professional service corporation in which the insured was the only stockholder has also been subject to the exclusion.
Benefits from health insurance are tax-free if obtained by the insured or a person with an insurable interest in the insured.
Medical expense reimbursement benefits must be factored into a taxpayer’s medical expense deduction calculation. Because only unreimbursed medical expenses are deductible, the entire amount of medical expenses paid in a given year must be subtracted from the total amount of reimbursements received in that year.
Similarly, if medical expenses are deducted in the year they are paid and then reimbursed in a subsequent year, the taxpayer or the taxpayer’s estate, where the deduction is taken on the decedent’s final return but later reimbursed to the taxpayer’s estate, must include the reimbursement in gross income for the subsequent year, to the extent of the prior year’s deduction.
When the value of a decedent’s right to reimbursement proceeds, which is income in respect of a decedent, is included in the decedent’s estate, the share of estate tax due to such value is eligible for an income tax credit.
Disability income is not considered reimbursement for medical expenses and so cannot be used to offset them.
Example. Mr. Jones, who earned $25,000 in adjusted gross income in 2012, spent $3,000 on medical expenses. He deducted $1,125 in medical expenses on his 2012 tax return. Mr. Jones’ health insurance provides him with the following benefits in 2013: $1,200 in disability income; $400 in reimbursement for 2012 doctor and hospital expenditures. On his 2013 tax return, he must record $400 in taxable income. Mr. Jones’ medical expense deduction for that year would have been limited to $725 ($3,000 $400 $1,875) if he had received the reimbursement in 2012. He would have gotten the entire amount of insurance benefits, including medical expense reimbursement, tax-free if he had not done so.
How is employer-provided disability income coverage taxed?
As with all premiums paid for health insurance, an employer can normally deduct all premiums paid for disability income coverage for one or more employees as a business expenditure.
Whether coverage is given under a group policy or individual policies, premiums are deductible by the employer. The deduction is only valid if the benefits are paid to employees or their dependents; it is not valid if the benefits are paid to the employer.
When the corporation was the premium payor, owner, and beneficiary of a disability income policy insuring an employee-shareholder, the deduction of premiums was forbidden. The premiums were funds expended to produce tax-exempt income, according to the Tax Court, hence the deduction was barred by IRC Section 265(a). The Tax Court ruled that any disability income policy benefits would have been tax-free under IRC Section 104(a) if they had been paid (3).
Sick pay, wage continuation payments, and disability income benefits, both pre- and post-retirement, are normally fully includible in gross income and taxable to the employee. Long-term disability income payments obtained under a policy paid for by an employer, for example, are fully includible in a taxpayer’s income.
A lump sum payment received from the insurance company that supplied the employee’s employer-paid long-term disability coverage could not be deducted from income by a disabled former employee. The lump sum form of the settlement did not alter the nature of the payout, which was still a reimbursement made under accident or health insurance.
The part of disability income related to the employee’s contributions is tax-free if benefits are received under a plan to which the employee has contributed. An employee’s contributions for the current policy year are taken into account under an individual policy. If an employee’s contributions for the previous three years are known, they are taken into account under a group policy.
The IRS held in Revenue Ruling 2004-55 that the three-year look back rule did not apply because the plan was altered so that the updated plan was financed solely by the employer or solely by the employee for each employee. If a plan is not considered a contributing plan, the three-year look back rule does not apply.
An company may allow employees to choose whether premiums for a group disability income policy should be included in their income for the year on an annual basis. Benefits received during a period of disability beginning in that tax year will not be taxed if the employee elects to have premiums included in his or her income. An employee’s election will be effective for each tax year, regardless of preceding years’ employer and employee payments.
The benefit payments he received while disabled were excludable from income under IRC Section 104(a) when an employee-owner reimbursed his corporation for the payment of premiums on a disability income policy (3).
The benefits paid from the disability income policy during the second benefit-paying period were not includable in the employee’s income because an employer first paid the premiums but, prior to a second period of benefit payments, an employee took responsibility for paying premiums directly.
Is Accidental Death life insurance taxable?
Accidental death insurance functions similarly to other types of life insurance, with the exception that you must die in a certain manner. The death benefit, like other types of life insurance, is not subject to income tax.
Is AD&D a taxable benefit in us?
Employer-paid premiums for Accidental Death & Dismemberment (AD&D) and Critical Illness (CI) will become taxable benefits on March 29, 2012, according to the federal government. Employer-provided AD&D and CI premiums are currently non-taxable benefits to employees.
Can you write off accident insurance?
Losses incurred as a result of a car accident may be deducted from federal taxable income. Property losses and medical bills are both deductible losses. Property-loss deductions must be reported on a separate tax return.
What insurance is tax-deductible?
Any out-of-pocket health insurance premiums for coverage that cover medical care are tax deductible. (Medical insurance coverage, with few exceptions, cover hospitalization, surgery, and X-rays, as well as prescription medications and insulin, dental care, lost or broken contact lenses, and long-term care.) You can deduct these expenses for yourself, your spouse, and your dependents when filing your taxes.
Premiums for COBRA insurance, as well as Medicare Part B and D premiums, are tax deductible. Premiums paid for Medicare A are also tax-deductible if you are not enrolled in Medicare through Social Security and are not a former government employee who paid Medicare tax.
Any premiums you pay out of pocket for health insurance purchased through the federal insurance marketplace or your state marketplace are tax deductible.
You can deduct the amount you spent for health insurance and eligible long-term care insurance premiums directly from your income if you are self-employed. This decreases your tax burden by lowering your adjusted gross income (AGI). Medical and dental expenditures may be deducted as itemized deductions on Schedule A of IRS Form 1040.
However, whether you’re employed or self-employed, you can only deduct medical expenses that exceed 7.5 percent of your adjusted gross income.
Is there imputed income on AD&D?
Imputed income applies exclusively to the volume of the Life plan for employees who are enrolled in both a Life and an AD&D plan. For AD&D coverage, there is no imputed income.
- Because the plans are bundled and have the same volume, imputed income is calculated as if they were a single Life plan. To put it another way, for a combined Basic or Voluntary Life and AD&D plan with $500,000 in premiums,
Is AD&D insurance a fringe benefit?
Health, dental, vision, hospital and accident (AD&D) insurance premiums, and eligible long-term care (LTC) insurance premiums paid under a business plan are examples of includable fringe benefits.
Are AFLAC payments taxable?
No, in most cases. If you did not deduct the premiums and this is not an employer-provided fringe benefit, the proceeds of an accident and health policy, such as AFLAC, are not reportable as income.
Some of the benefits you receive may be taxable if you pay your premiums with pre-tax cash through a flexible benefits plan or if your employer pays part or all of your premiums. Only the amount you get for your disability that is due to your employer’s payments is reported as income if both you and your employer have paid the premiums for the plan. As a result, your employer may provide you a W-2 form that includes the amount of taxable benefits you received.
What is AD&D beneficiary?
Accidental death and dismemberment (AD&D) insurance is a type of coverage that pays benefits to the beneficiary if the death is caused by an accident. This is a limited type of life insurance that is usually less expensive or, in some situations, is a benefit added to an existing life insurance policy.
Are funeral expenses tax deductible?
Individual taxpayers are unable to claim a tax deduction for funeral expenditures. While the IRS allows medical expenses to be deducted, funeral fees are not. Medical expenses must be utilized to prevent or treat a medical ailment or condition in order to be considered qualified.
Deducting funeral expenses as part of an estate
If you are settling an estate, you may be entitled to claim a funeral expense deduction if the charges were paid using assets from the estate. Because most estates are less than the taxable amount, many estates do not take advantage of this reduction. Executors of taxable estates, on the other hand, can lower the estate’s overall taxable income by taking different deductions, including burial expenditures.
Reporting funeral expenses on Form 706
When you’re in charge of an estate, you’ll utilize Form 706, United States Estate (and Generation Skipping Transfer) Tax Return, to figure out how much tax the estate owes. Schedule J, Funeral Expenses and Expenses Incurred in Administering Property Subject to Claims, is an attachment to Form 706 that must be completed to disclose funeral expenses. You should itemize the funeral expenses on this schedule and total them under Total funeral expenses.
Accounting for reimbursed expenses
You must deduct any reimbursements from your total expenses before claiming them on Form 706. This includes payouts from the government, such as Social Security or VA death benefits. There is no deduction for such payments.