What are medical insurance premiums
Dear Tax Talk,
I took early retirement from my past employer and took the option of keeping the health insurance as a retiree. My family health and dental premiums are going up to more than $661 per month in 2012. The premium is deducted from my pension check after tax. I was told as a retiree, the premium could not be a pretax deduction. I currently work full time elsewhere.
Are health insurance premiums tax-deductible? It is really good insurance, better than what I can get at my current employer, and it's available to me at the retiree rate as long as I live.
You can always deduct your premiums as medical expenses on Schedule A, Itemized Deductions. The downside is you have to itemize, and the total of your medical expenses has to exceed 7.5 percent of your income before you get any tax benefit. It would be better if you could receive the health insurance premiums as a tax-free benefit, similar to when you were an employee.
Employer-paid health insurance is a tax-free benefit to employees. The amount the employer pays is not income to employees, including retired employees. If an employee pays a portion of the health insurance premium, the employer can establish a cafeteria plan. The cafeteria plan in effect reduces the employee's salary by the amount of the employee-paid premium,
which means the employee is receiving the health insurance tax-free. In the case of a retiree, the former employer cannot reduce your pension to give you a tax-free benefit under a cafeteria plan. There are work-around solutions, but it would be up to your former employer to implement them so you are not taxed on your premiums.
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