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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Re: Medical insurance and deduction for Dom. Par Date: 12/9/2007 9:18 AM
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Yes, it's coming out pre-tax. HR asked if I wanted it like that. I asked if there would be a problem doing it and they said no, so that's what I chose. Even tho it's coming out pre-tax, it's still extremely expensive.

HR doesn't seem to understand the law, or they are ignorant of the problems that this can result in.

The question is, how is it going to show up on your W-2? As part of your taxable income or not? If it has been coming out as pre-tax and then shows up as part of your taxable income, you may have a significant tax surprise, including possible penalties for underwithholding. Since your HR department isn't supposed to advise you on tax issues, they may not consider this a problem, but it is. According to IRS rulings, this benefit is supposed to be taxable, so you may want to go back and ask a few more questions and see if you can up your tax withholdings for the last paycheck or two if you get the answer that it will be taxable income to you.

If it's going to show up as un-taxed income like your premiums do, then you've already gotten the tax benefit. However, your HR and payroll departments may have an issue, as they have not followed the law.

But, technically, he is paying for it himself.

If it's coming out of your paycheck, technically, he's not paying for it himself. Even if he reimburses you for the expense, he was not the one that paid the insurance company - you were, since it came out of your paycheck. For him, it's not a medical expense, since you are not a medical or insurance provider, and for you, it's not a dependent expense, so neither of you gets to deduct it.

I suppose if he wanted to try deducting it, he could argue traceability if he has paid you with some form of payment that is specifically identified as being reimbursement for the insurance on a regular basis. But, if audited, that would probably end up requiring a lot of lawyer's fees to argue, and since the medical deduction is limited to amounts over 7.5% of AGI, it might not be worth it.

My insurance is considerably better than his. Granted, it's more expensive, but his coverages stink for being $2k less per year.

In this case, if it shows up as part of your taxable income, it's costing more than just $7k - depending on your tax bracket, the cost is actually between $8.24k (15% bracket) - $10.77k (35% bracket), grossed up. If it shows as untaxed income, then the cost is $7k.

AJ
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