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28 Cards in this Set
- Front
- Back
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Taxation of Health Insurance Policies
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• To understand the taxation of health insurance,
it is beneficial to organize coverage into the following groups – Individually owned – Group – Sole proprietors and partners – Business |
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Individual Policies pt.1
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• Premiums for individually owned accident,
health, disability, or long-term care policies generally are not deductible to the individual taxpayer • However, if the taxpayer’s medical expenses exceed 7.5% of adjusted gross income during a taxable year, any medical expenses, including premiums for accident and health insurance (but not disability insurance) incurred above the 7.5% threshold can be deducted |
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Individual Policies pt. 2
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• Benefits paid by individually owned accident,
health, disability, or long-term care policies generally are received income-tax free by the taxpayer, provided the benefits do not exceed the actual expenses |
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Individual Policies pt. 3
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• Benefits paid by individually owned accident,
health, disability, or long-term care policies generally are received income tax-free by the taxpayer, provided the benefits do not exceed actual expenses |
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Disability Income Insurance
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• Premiums paid by the insured are not tax
deductible • Benefits paid in this type of situation are tax free to the insured |
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Long-Term Care Insurance pt. 1
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• There is an annual dollar limit for deductions
– This limit is based on the taxpayer’s age • Congress has determined that individual longterm care insurance policies must be treated the same as accident and health policies tax wise, as long as such policies are qualified according to federal law – Individual premiums may be deductible if the 7.5% of adjusted gross income threshold is exceeded |
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Long-Term Care Insurance pt. 2
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• All qualified long-term care policy benefits are
received income tax-free, so long as they do not exceed actual expenses • Not yet clear what the status is of nonqualified long-term care policy premiums and benefits, but until that is clarified it is best to treat nonqualified policies as if they did not have the tax advantages of qualified policies |
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Group Accident, Health,
and Dental Coverage |
• Premiums paid by a company for group
accident, health, and dental coverage for its employees are generally deductible by the company as a business expense • Premiums are not taxed to the employees • Benefits received by the employees are incometax free to the extent the benefits do not exceed actual expenses |
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Group Disability Insurance pt. 1
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• Premiums paid by a company for group disability
insurance for its employees are generally deductible by the company as a business expense • Premiums are not taxed to the employees, but the benefits are taxable • However, if an employee pays all or part of the premiums for group disability coverage – Employee may not deduct these premiums, but the benefits will be received income tax-free for the portion for which the employee paid the premiums |
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Group Disability Insurance pt. 2
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• However, if an employee pays (continued)
– Example • Employee pays 50% of the disability income premium, employer pays 50% of the premium • Then 50% of the benefit would not be taxable (based on 50% of premium employee paid) and 50% of the benefit would be taxable (based on the 50% the employer paid) • Disability benefits are subject to Social Security tax (FICA) and federal unemployment tax (FUTA) for the first six calendar months following the last month the employee was on the job |
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Group Accidental Death and
Dismemberment Coverage |
• Group accidental death and dismemberment
coverage premiums may be deducted as a business expense by companies • Premiums are not taxable to the employees, and benefits are received income tax-free |
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Qualified Group Long-Term Care Insurance pt. 1
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• Qualified group long-term care insurance, like
individually owned long-term care, is treated the same as other group health policies • Companies offering this coverage may deduct any premiums paid as a business expense |
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Qualified Group Long-Term Care Insurance pt. 2
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• Employee is not taxed on these premiums, and
benefits are tax exempt • However, these tax advantages do not apply to group long-term care coverage provided through a Section 125 cafeteria plan, and expenses for long-term care services cannot be reimbursed under flexible spending arrangements |
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Sole Proprietors and Partnerships pt. 1
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• Self-employed persons are allowed to deduct
from their gross incomes 100% of the amount they pay for health insurance – Including qualified long-term care insurance – To claim this deduction, however, self-employed persons • Must show a net profit for the year • Cannot claim the deduction for any month in which they were eligible to participate in a health plan subsidized by their employer or by the employer of their spouse |
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Sole Proprietors and Partnerships pt. 2
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• Payments of premiums by a partnership for a
partner’s health and accident insurance is generally deductible by the partnership – Amount of the premiums is included in the partner’s gross income, but it is deductible on the same basis as that for self-employed persons–100% |
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Business Policies pt. 1
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• Business overhead expense insurance
– Premiums paid for business overhead expense insurance are deductible as a business expense whether the business is a sole proprietorship, partnership, or corporation – Proceeds of business overhead expense insurance, however, are taxable • Disability policy used to fund a buy-sell agreement – Premiums paid for a disability policy used to fund a buy-sell agreement are not deductible, proceeds are not taxable |
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Business Policies pt. 2
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• Key employee disability policy
– Premiums paid for a key employee disability policy are not deductible, proceeds are not taxable • Regarding the taxation of business insurance premiums, the basic premise is – Either the premium or the benefit will be taxed • If the premium is not deductible to the business, the benefits will be received tax free • If the premium is deductible, then the benefits are taxable |
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Medicare Supplement Insurance pt. 1
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Individual Medicare supplement insurance
premiums – Are considered deductible medical expenses to the extent that the combination of premiums paid plus other unreimbursed medical expenses exceeds 7.5% of adjusted gross income – Benefits are considered reimbursements for medical expenses already incurred and therefore received tax free |
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Medicare Supplement Insurance pt. 2
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Premiums paid by an employer for group
Medicare supplement insurance – Tax deductible to the employer – Benefits are received tax free |
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Long-Term Care Insurance pt. 1
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The Health Insurance Portability and
Accountability Act of 1996 – Provided that premiums paid for individually owned long-term care insurance are tax deductible to the extent that combined premiums and unreimbursed medical expenses exceed 7.5% of adjusted gross income – This tax deductibility is subject to age-related limits ranging • From $310 per year for taxpayers under age 40 • To $3,850 per year for taxpayers age 71 and older – Both of above are limits for 2008 and are subject to annual indexing for inflation |
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Long-Term Care Insurance pt. 2
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• Premiums for group LTC insurance paid by
employers – Deductible as a business expense • But coverage cannot be part of a cafeteria plan or flexible spending account – Benefits are received tax free up to specified limits, which are indexed annually for inflation |
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Long-Term Care Insurance pt. 3
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• LTC policies issued on or after January 1, 1997,
must meet federal standards for tax-qualified status – Individual must be certified by a licensed health care professional to be chronically ill with a condition that is expected to last at least 90 days, and must have a plan of care |
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Long-Term Care Insurance pt. 4
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• LTC policies issued (continued)
– Chronically ill means that the individual • Is unable without substantial help from another person to perform at least two of five (or six) activities of daily living (ADLs) for at least 90 days – ADLs include bathing, dressing, toileting, transferring, eating, and continence – State legislatures determine whether to include five or all six of the ADLs • Needs substantial supervision because of a cognitive impairment (i.e., Alzheimer’s disease) • The individual must be recertified as chronically ill on an annual basis |
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Long-Term Care Insurance pt. 5
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• LTC policies issued before January 1, 1997 are
grandfathered and are automatically tax qualified • The new federal standards also establish consumer protection standards such as – Guaranteed renewability – The option to add inflation protection and nonforfeiture benefits (but not in the form of cash surrender values) – Impose new disclosure requirements |
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Medicare
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• As a government social program, Medicare is
largely paid for by federal taxes – Medicare Part A – Hospital Insurance • Primarily supported by Social Security payroll taxes (FICA) – Medicare Part B – Medical Insurance • Supported by – Premiums from beneficiaries – General tax revenue |
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Social Security Disability Benefits pt. 1
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• Social Security disability benefits are financed
through a payroll tax (FICA) – Employee pays 50%, employer pays 50% • The tax rate is applied to an employee’s gross wages (up to the current wage base) and an appropriate amount is deducted from the employee’s wages each pay period • A like amount is contributed by the employer – Self-employed persons must pay 100% of the combined employee/employer tax rate |
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Social Security Disability Benefits pt. 2
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• Employers may take a tax deduction for
contributions on behalf of their employees as a routine and necessary cost of doing business • Employees are not entitled to a deduction for their share of the Social Security tax – Employee Social Security taxes are paid with after-tax dollars |
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Taxation of Social Security Benefits
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• Social Security benefits are generally received
free of income tax • However, federal income taxes are imposed on some benefits if the taxpayer has a substantial amount of additional income • At this time the specifics of calculations is not important, but it is it is important to understand that Social Security benefits may not be entirely free from federal income taxes |
