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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: anastrophe on April 06, 2015, 01:06:28 PM
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This year I have the option to change the tax status of my health insurance premiums. They can either be pre-tax or, starting this year, I can elect to have them taxed instead.
What's the benefit of having the premiums taxed--so you can deduct them? In what situation would that be advantageous? Please educate me.
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One thing: those deductions will lower your wages for Social Security purposes. The benefit is paying less in SS tax now. The downside is accumulating less in SS wages toward your eventual SS income.
Very much an "it depends on your situation" - but I'd be inclined to take the bird in hand (i.e., pay the insurance pre-tax) if asked to generalize.
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Is the question based on whether you as an individual want to use an HSA or FSA or pay your premiums?
Or do you mean have your company pay the health premiums as part of a Fringe benefit?
If fringe, it is reported on your W-2 as taxable income, but medicare is not taxed on it (so your W-2 boxes for W-2 income and Medicare income are different because of this). For me, I then deduct part of the cost of the premium from my personal return.
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Is the question based on whether you as an individual want to use an HSA or FSA or pay your premiums?
Or do you mean have your company pay the health premiums as part of a Fringe benefit?
Fringe. It's a traditional employer-sponsored health insurance plan, no FSA or HSA involved. The company pays the majority of the premium and I pay the employee share, usually on a pre-tax basis. This year I could choose to have the deductions taxed instead.
I assume it would be helpful for people in certain income brackets or some other certain situations, but I can't figure out why you would do that?
One thing: those deductions will lower your wages for Social Security purposes. The benefit is paying less in SS tax now. The downside is accumulating less in SS wages toward your eventual SS income.
I have no eligibility for SS retirement at this point, this job is not covered by SS and I contribute Medicare only. I'm not sure what effect that has.
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I have no eligibility for SS retirement at this point, this job is not covered by SS.
Then I agree with your inclination to pay it pre-tax.
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Would it be of benefit to you if you, say, had some other deductions that alone wouldn't get you over the standard deduction, but if you took your health insurance premiums taxed, that would put you over the standard deduction for the year, thereby saving you on the tax bill.
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Would it be of benefit to you if you, say, had some other deductions that alone wouldn't get you over the standard deduction, but if you took your health insurance premiums taxed, that would put you over the standard deduction for the year, thereby saving you on the tax bill.
A very simplified look at one's income is below. Whether the insurance payments are subtracted immediately from gross salary, or later as part of itemized deductions, the result is the same. And that's assuming there are enough other medical expenses to allow full subtraction of the insurance.
In addition to the SS wage base item noted above, there is another item in the tax code that could be affected: the Earned Income Credit. Part of the EIC calculation uses the "salary reported on a W-2" and in some ranges the EIC increases as that salary increases.
Similar to what the SS folks do, it's possible an employer's pension calculation uses the SS wage base instead of gross income.
Also, you could decline coverage from the employer's health plan and buy it yourself using after-tax dollars.
In short, there could be reasons, in specific employer or employee situations, that make it better to eschew the pre-tax route - but for most people pre-tax will be better.
Gross salary
- Pre-tax med. ins.
= Soc. Sec. wage base
Soc. Sec. wage base
- 401k contribution
= Salary reported on a W-2
Salary reported on a W-2
- Traditional IRA
- Student loan interest
= AGI
AGI
- Deductions
- Exemptions
= Taxable income