The U.S. Internal Revenue Service (IRS) requires virtually all American citizens to pay taxes on their taxable incomes. According to the Legal Information Institute, the consequences of failure to file taxes range from fines and other financial penalties, to jail term for tax evasion. Some of the individuals that may be exempt from paying income tax include, among others, certain groups of low-income earners and individuals with many dependents. To avoid falling foul of the tax laws, you should understand your tax obligation, including all the exemptions and allowances that apply to you, especially if you carry health insurance coverage. Here’s some more information on this topic.
Self-Insured Health Insurance
According to the Self-Insurance Institute of America (SIIA), self-insured insurance is a type of policy in which the employer collects insurance premiums from the employees and pays for claims out of pocket. To ease the burden of administration and claim processing, the employer may contract an insurance company to manage the plan. While this is one of the most affordable group health insurance plans in the U.S., it does not qualify for tax exemption largely because the employer usually offers some stipend to employees to purchase health insurance, which the federal government views as a salary. While the employee may only pay a small portion of the premiums through stipends, this health insurance coverage is still considered an employer’s contribution, and it is different from group health plans.
When You Receive a Payout
Usually, a health insurance policy pays for medical expenses involved in consultation, treatment, check-ups, and prescriptions, per the Substance Abuse and Mental Health Services Administration (SAMHSA). However, in case of a chronic illness or disability, the insurance company may opt to pay you a lump sum from your insurance policy to cater to your daily expenses. The bad news is that the federal government views such a payout as income, and hence, your disability benefits will most likely be taxed. Even so, the payout must exceed a certain amount for the government to tax you.
How to Lower Your Health Insurance Taxes
Since the traditional health insurance plan is tax-deductible, it is prudent to say that purchasing it can save you from excessive taxation. Additionally, enrolling in employee-sponsored health insurance coverage can exempt your benefits from taxation, since such policies are eligible for tax advantages. Take note that even if your health insurance benefits are taxable, you can still deduct any unreimbursed medical expenses that you paid out of pocket for yourself and your dependents. Even so, this only applies if your expenses exceed 7.5% of your adjusted gross income (AGI).
These are some of the instances when health insurance benefits are taxable in the U.S. To find the right health insurance plan for your needs, talk to the professionals at Lou Aggetta Insurance Services in Pleasant Hill. Our experts are ready and waiting to help you determine your health insurance needs and explain how a policy can protect your finances. Give us a call today to get started!