Your Money: Understanding what to pick in the healthcare cafeteria
June 26, 2013
Have you ever heard your benefits referred to as a cafeteria plan, or seen the word "café" on your paystub? While it may sound a bit weird, it refers to the idea that employees often have an option to choose their benefits from a wide variety of options, similar to the food line in a cafeteria. Whether you are an employee or not, there are so many options when it comes to deducting your health insurance that it does feel like you are facing a buffet full of choices.
As an employee, you are often offered a package of health insurance, life insurance, dependent care benefits and retirement plans. Focusing just on the health benefits, these are normally offered to employees on a pre-tax basis. That means that whatever portion you pay towards your benefits are deducted from your taxable income, and therefore don't appear on your W-2. Whether you itemize your deductions or not, these expenses are already deducted from your pay before it reaches your W-2, so you don't pay tax on the cost.
One thing to consider: I often work with small employers who do not know whether their insurance plans are pre-tax or post-tax. I recommend that everyone ask their employer for clarification on their benefits. If their employer doesn't know the answer, they should ask the human resources department, payroll department, or even the benefits provider to get a straight answer.
If you find out that your employer's plan isn't pre-tax, or you aren't offered health insurance through work, then there are other options available. Many taxpayers have either a flex spending account or a health savings account. Both allow people to make contributions to a specific account tax-free, and therefore provide tax savings. Flex spending accounts are usually offered through employees, and have a "use it or lose it" policy. If you set aside $2,000 and only spend $1,800 on medical expenses during the plan year, then the remaining $200 is forfeited. Health savings accounts, on the other hand, carry over year after year, and are generally held at specific banks, rather than with an employer.
If your employer doesn't provide benefits, you may still have an option to deduct your health insurance costs. If you are self-employed, you can deduct health insurance costs on page one of your tax return. If you are not self-employed, you can deduct your health insurance premiums, as well as your other medical expenses, on your Schedule A to the extent that your expenses are more than 7 1/2 percent of your adjusted gross income.
There is no doubt that the simplest way to deduct your health insurance premiums is by participating in an employer's plan, but if you don't have access to one or the costs are prohibitive, it's reassuring to know that there are other tax benefits available to the masses. As always, if you aren't sure what works best for your family, you should always consult a tax advisor to help you work through the scenarios. This is one of the many areas of tax law that doesn't have a clear-cut answer, every taxpayer has a different path that is most beneficial to them.
Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit http://www.cpamichele.com.
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