Deductions for Costs of Health Care: Part 1

The cost of health care in the United States is a frequent topic in the news and in conversations these days, and it´s generally not what you´d call upbeat. The subject comes up in our household every time we have to pay bills for medical services on top of outrageously high medical insurance premiums (my husband and I both have high-deductible policies). Sadly, it appears that U.S. health care isn´t the best in the world, just the most expensive. (See, for example, a paper prepared by the Bureau of Labor Education, University of Maine "The U.S. Health Care System: Best in World, or Just the Most Expensive?" which indicates that U.S. health care is indeed the most expensive, but that with respect to the actual health of its residents, the U.S. ranks last in most health categories among the 29 high income members of the OECD)

OK, I haven´t forgotten that this blog is about taxes, not the costs or benefits of health care. Here´s the connection: for anyone who pays taxes, a reduction in taxes is the equivalent of a government subsidy. And here in the U.S. we do have several (some might say, a bewildering assortment of) tax deductions and credits for expenses of health care.

I had planned to dive right into health care deductions for small businesses, but when I asked my PhD husband to take a look at the article before I posted it, he told me he didn´t have a clue what any of it meant. So I think I need to start with the basics.

The simplest situation for a U.S. resident taxpayer is where the person works as an employee and signs up to participate in the employer´s health plan. Let´s look at an example: As a full-time employee of Sweet Mountain Magic Inc, Esther is eligible to participate in the company´s health care plan. The company pays 100% of the cost of medical insurance for Esther, and Esther has signed up for withholding from her paychecks to cover her husband and son under the same company plan.

Esther´s total monthly premium comes to $500, $300 of which is paid by the company and $200 of which is withheld from Esther´s first paycheck of each month. When Esther gets her W-2 at the end of the year, her reported salary is $83,000; but Esther´s total compensation for the year was actually $89,000. The $6000 that went to pay for medical insurance premiums is not included in the figures on the W-2, and thus is not a part of Esther´s gross income for tax purposes. Esther has saved $1500 in income taxes and $459 in FICA taxes (social security and Medicare). Her company has saved an additional $459 on its share of Esther´s FICA taxes, so it can now afford to pay a somewhat higher salary to Esther or provide her with additional benefits.

I´ll continue tomorrow with Part 2 — A Comparison of Employee and Self-Employed Deductions for Expenses of Health Care Insurance