Additional Tax Leverage Through Your Health Insurance « Independent Income Advisors

Additional Tax Leverage Through Your Health Insurance

Saturday, July 16, 2016 @ 01:07 PM
Author: Peter Young

I was talking to a client on the subject of annuities when he brought up his health insurance.  He had been talking about how all of his savings were tax-free or tax-deferred; but when the conversation turned to health insurance, there were a couple of things he’d been missing.

Firstly, he had not heard of Health Savings Accounts.

I explained that a Health Savings Account is a bank account separate from a health insurance policy.  It allows an individual to set aside up to $3350 in 2016 ($3400 in 2017), and take the same amount off their gross taxes when they file their form 1040.

Money in the account can be used to pay for anything the IRS calls a Qualified Medical Expense – a much broader definition than a health insurance company’s definition of a covered expense – without the individual having to pay tax on money withdrawn to pay said expenses.  The principle is well-known to most people working in corporate jobs because many benefit plans include a flex-spending account.  A Health Savings Account however has a distinct advantage: it does not have a “use it or lose it” provision.  So, any dollars still in the account at midnight on December 31 are still there on January 1st.

The predictable follow-up question from the client was, of course: “Can I pay my health insurance premiums out of the Health Savings Account?”  No. (Although you can pay long-term-care insurance premiums out of it!)

“But,” I asked, “don’t you write off your health insurance premiums anyway?”

No, he didn’t, and as a self-employed person, he probably could, assuming his business is making money.  Premiums for a self-insured person could be written off as an adjustment to income on line 29 of his 1040.  Health Savings Account contributions are an adjustment to income on line 25.

As in all matters IRS, there are exceptions and conditions.  Contribution amounts for a Health Savings Account differ for couples, single parents, families and taxpayers over 55.  You have to have the right kind of health insurance to have a Health Savings Account — it must be a High Deductible Health Plan as defined by the IRS, as opposed to a health insurance policy that has a high deductible (not necessarily the same thing!)

Deductions for health insurance premiums could be reduced if a taxpayer can get on his/her wife/husband’s group insurance.  Also be aware that rules differ somewhat according to whether the taxpayer is a sole-proprietor, partner, or owner of a sub-chapter S corporation.

Fortunately, the IRS has nice little booklets (with worksheets!) that explain the various ins and outs of Health Savings Accounts (Publication 969), and deductible health insurance premiums (Publication 535, Business Expenses.)   Also recommended reading: Publication 502 on what is a Qualified Medical Expense.

Self-employed business folks can get additional tax leverage out of their health insurance plan,  but it’s always a good thing to talk these things over with your usual source of tax advice to make sure all “i’s” are dotted and all “t’s” are crossed.


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