Key Elements of the U.S. Tax System

In 2019, the federal government lost roughly $234 billion in income tax revenue from at least eight tax preferences for health care. By far the most costly is the exclusion of employer contributions for health insurance premiums from taxable income.

Exclusion for employer contributions to health insurance

Employer and most employee contributions to health insurance premiums are excluded from income taxes. The Joint Committee on Taxation estimates that the income tax expenditure on the exclusion for employer-sponsored health insurance was over $153 billion in fiscal year 2019. Employer contributions for health insurance premiums are also excluded from employees’ taxable wages when calculating payroll taxes. Including its impact on both income and payroll taxes, the exclusion reduced government revenue by $273 billion in 2019.

other major tax expenditures for Health care

Table 1 outlines the other major federal tax expenditures for health care:

• Individuals ineligible for employer-sponsored or public health insurance may receive subsidies to purchase insurance on Affordable Care Act Marketplaces ($53 billion).
• Individuals may claim as an itemized deduction out-of-pocket medical expenses and health insurance premiums paid with after-tax dollars and exceeding 7.5 percent of their adjusted gross income in 2019 and 2020 and 10 percent of their income in subsequent years ($7 billion).
• Individuals younger than 65 covered by high-deductible health insurance plans may take an income tax deduction for contributions to health savings accounts (HSAs). Employers may make HSA contributions that are excluded from income and payroll taxes. Additionally, HSA balances grow tax-free, and withdrawals for medical expenses are not subject to income tax ($7 billion).
• Self-employed individuals may deduct health insurance premiums from their income ($6 billion).
• Coverage for military retirees and dependents is excluded from taxable income ($4 billion).
• Medical benefits provided by workers’ compensation insurance are excluded from taxable income ($4 billion).