 Deducting
private health insurance
|  Dear
Tax Talk,
My employer does not provide health
insurance. I buy private health insurance for my family of five,
and we have a very large deductible. This particular year, my wife
and one of my children have gone in excess of the $2,500 deductible.
Can we write off any portion of the insurance?
We pay about $375 a month for the premium and
have paid about $6,000 in deductibles and co-pays. Our annual income
after write-offs and such is about $65,000. -- Sean
 Dear
Sean,
While I can answer your question easily, I'm
going to try to give you some better advice as well. Medical insurance
and expenditures are deductible as itemized deductions. However,
the expenditures only give you a tax benefit if they exceed 7.5
percent of your AGI, or adjusted gross income. If your income is
$65,000 after write-offs, your AGI will be higher, since it is computed
before itemized deductions and personal exemptions.
If your AGI is $80,000, your deductible medical expenses
are reduced by 7.5 percent or $6,000. This means that of the $10,500
($6,000 plus $375 x 12 months) in expenditures, you can only deduct
$4,500. You should be in a 25 percent tax bracket, so your tax savings
on $4,500 in deductions is $1,125.
Here is the added advice: Have you looked into a health
savings account? HSAs were approved by Congress starting in 2004.
An HSA is like an IRA, but it is used for medical expenses instead
of retirement. Publication
969 lists the following advantages of HSAs:
- You can claim a tax deduction for contributions
you, or someone other than your employer, make to your HSA even
if you do not itemize your deductions on Form 1040.
- Contributions to your HSA made by your employer,
including contributions made through a cafeteria plan, may be
excluded from your gross income.
- The contributions remain in your account from
year to year until you use them.
- The interest or other earnings on the assets in
the account are tax-free.
- Distributions may be tax-free if you pay qualified
medical expenses.
- An HSA is "portable" so it stays with
you if you change employers or leave the workforce.
In order to qualify for an HSA, you have to have a
high-deductible health plan, which you do. I wrote about this relatively
new tax break in an earlier
column. Unfortunately, insurance premiums are not an eligible
expense under an HSA. You might want to talk to your employer about
health reimbursement arrangements or flexible
spending accounts.
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