Hello, currently I have my wife on my employer sponsored health insurance. I am not happy with the coverage and we would save a lot by going to an individual PLAN for next year when open enrollment starts. Is there a tax deduction for the insurance premiums or am I able to use pre-tax dollars in this situation? I have an HSA and can enroll in an FSA.
The only way your health insurance premiums are deductible is if you pay them out of pocket. And they would only be deductible if you have enough other medical expenses. Only the amount of medical expenses over 7.5.% of your AGI are deductible. And...it is even harder than that---you need enough other itemized deductions like mortgage interest and property taxes, etc. to exceed your standard deduction or you just get the standard deduction. It is really hard to get a medical expense deduction.
If you put money in a HSA or FSA, that money is pre-tax, so you cannot deduct it. That would be double-dipping.
MEDICAL EXPENSES
The medical expense deduction has to meet a rather large threshold before it can affect your return. The amount of medical (including dental, vision, etc.) expenses that will count toward itemization is the amount that is OVER 7.5% of your adjusted gross income. You should only enter the amount that you paid in 2019—do not include any amounts that were covered by insurance or that are still outstanding. Of course, your medical expenses plus your other itemized deductions still have to exceed your standard deduction before you will see a difference in your tax due or refund.
To enter your medical expenses go to Federal>Deductions and Credits>Medical>Medical Expenses
Warning an HSA can't be used to pay medical insurance premiums. such use would subject those payments to a 20% penalty. there should not be the same issue with an FSA.
You can't use money from an HSA or an FSA to pay medical insurance premiums. See publication 969, pages 10 and 18.
https://www.irs.gov/pub/irs-pdf/p969.pdf
Also, you will have to be careful that the plan you select is eligible for further HSA contributions. Once you own an HSA, you can spend the money for any qualified medical expense, but you can't make contributions unless you are enrolled in a qualifying High Deductible Health Plan.
Also beware that if you enroll in an FSA, you will be disqualified from making contributions to your HSA, unless it is a "limited purpose" FSA. Because you can use FSA funds to pay for medical expenses for yourself or your spouse, it counts as "other medical coverage" that disqualifies you from contributing to an HSA. (Except for a limited purpose FSA, see publication 969.)
It's not clear if you mean that you want to move your wife to a private plan, or that you want to both move to a private plan. If you move your wife to a private plan, your maximum contribution limit to your HSA will be reduced from the family level ($7200) to the single level ($3600). If your wife enrolls in a private marketplace plan that is HSA qualified, then she could open a separate HSA in her own name and also contribute up to the individual maximum. (Remember that an HSA is owned by one person only, there are no joint HSAs.)
The only tax break for paying private insurance premiums is the ability to deduct the premiums on schedule A, after meeting the 7.5% floor and assuming you itemize your deductions in the first place. Because health insurance premiums are deducted before federal income tax, state income tax, and before social security and medicare tax, you likely save close to 35-40% in taxes by using an employer sponsored plan. With the limitations on the schedule A deduction, your private policy would have to be 30% cheaper before you could think about breaking even. Are you sure this is the right thing to do?
How come pre-tax dollars can be used to pay for premiums on an employer sponsored plan but not on an individual plan?
@axescot78 wrote:
How come pre-tax dollars can be used to pay for premiums on an employer sponsored plan but not on an individual plan?
That's how Congress wrote the laws.
In part, the ability to deduct medical expenses that are more than 7.5% of your income will tend to confuse the issue because if you take the deduction but also used an HSA or FSA, then you are double-dipping.
In part, it has to do with how fringe benefit laws are written and the incentives to give employees generous benefits (probably inserted in the tax laws at the request of union lobbyists). Technically, when you enroll in employer-sponsored insurance, you enter a salary reduction agreement with your employer. Your salary is reduced, so it is never subject to tax in the first place, and your employer pays all the premium and gets to deduct it as a business expense (if they follow certain rules).
But what it boils down to is, "Because Congress."