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Health Care: What tax provisions subsidize the cost of health care?

Consumers of health care face reduced after-tax costs because a number of tax provisions subsidize either the purchase of health insurance or out-of-pocket medical expenses. Among the provisions generating the largest subsidies are (in descending order of size) the combined employer exclusion and employee deduction for employee health insurance premiums, the exclusion for Medicare and Medicaid coverage and benefits, the individual deduction for health insurance and expenses, the deduction for Health Savings Accounts, the deduction of insurance premiums for the self-employed, the deduction of premiums and benefits for the military, and the deduction for Flexible Spending Accounts.

  • Employer contributions to pay premiums for employee health insurance are not subject to income or payroll tax. In addition, employee contributions are often deducted from income before tax is withheld, so that employees pay no tax on the income they use to pay premiums for employer-sponsored health insurance. Estimated revenue cost in 2008: $116.5 billion (all estimates from the congressional Joint Committee on Taxation).
  • Health insurance coverage under Medicare or Medicaid is excluded from taxable income. Benefits paid from either program are similarly exempt from taxation. Estimated revenue cost in fiscal 2008: $42.8 billion.
  • Individuals may claim as an itemized deduction the portion of their health insurance premiums and other medical expenses that exceeds 7.5 percent of their adjusted gross income. Estimated revenue cost in fiscal 2008: $9.5 billion.
  • Individuals under 65 who are covered by a high-deductible health insurance plan, whether through their employer or through the nongroup market, may contribute to a Health Savings Account. The 2008 contribution limits are $2,900 for individuals with self-only coverage and $5,800 for individuals with family coverage. Individuals age 55 and older may make additional contributions of up to $900. Individual contributions are deductible from taxable income. Employer contributions (up to the limit minus any employee contribution) are not subject to income or payroll tax. Withdrawals from Health Savings Accounts for medical expenses are not subject to income tax. Estimated revenue cost in fiscal 2008: $8.1 billion.
  • Self-employed individuals may deduct from their income the entire cost of health insurance for themselves, their spouses, and their dependents (subject to certain conditions). Estimated revenue cost in fiscal 2008: $4.4 billion.
  • Health insurance coverage and benefits for current and retired members of the military and their dependents are excluded from taxable income. Estimated revenue cost in fiscal 2008: $3.3 billion.
  • Individuals whose employers offer Flexible Spending Accounts may set aside funds from their pay each year to cover health insurance premiums and most medical expenses. Employers set maximum funding levels with no legislated limit. Contributions are not subject to income or payroll taxes. Participants must set the level of their contributions before the beginning of the benefit year and forfeit any funds not used to pay for qualified medical expenses during the year. Estimated revenue cost in fiscal 2008: not available.
 
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   Entry 3 of 5