How is the health insurance stipend built into my hourly rate affecting my income tax?
January 31, 2008 2:09 PM   Subscribe

My new company doesn't provide health insurance but a $2500 stipend is "built into" my hourly rate to cover the cost. I've got a plan that costs $175/month but how much does it suck for me that the stipend money is being taxed?

I like the job and am happy to be insured. I just want to understand what it really costs me to handle my health care this way compared to the full benefits I got from previous employers, especially in regards to income tax. Can you help me think it through and do the math?

I'm a healthy, single, mid-twenties female living in DC and working in Virginia. I work full-time and am making $28/hour. (I'm anonymous because it's work-related. Throwaway e-mail account: insurancestipend@gmail.com)
posted by anonymous to Work & Money (9 answers total)
 
The expenditures you make on health insurance are tax-deductable.

Medical expenses include insurance premiums paid for accident and health or qualified long-term care insurance. You may not deduct insurance premiums for life insurance, for policies providing for loss of wages because of illness or injury, or policies that pay you a guaranteed amount each week for a sickness. In addition, the deduction for a qualified long–term care insurance policy's premium is limited. Refer to Publication 502 , Medical and Dental Expenses.
posted by phearlez at 2:17 PM on January 31, 2008


Assuming 50 weeks @ 40 hours, you're at $56k per year, so that last $2500 of your income is neatly within the 25% bracket; 25% of that $2500, or $625, goes right out the door for taxes, leaving you $1875 to work with. Even before taxes, $2500 doesn't buy much health insurance.

Not an accountant, but I think I got this right.

On preview re: phearlez' post, I think that the deductibility of health care expenditures only kicks in after you reach a certain (fairly high) threshold.
posted by jon1270 at 2:24 PM on January 31, 2008


Oh, and that's just the Federal part of the picture. I know nothing about the DC / VA part of it.
posted by jon1270 at 2:25 PM on January 31, 2008


"You may deduct only the amount by which your total medical care expenses for the year exceed 7.5% of your adjusted gross income." (op. cit.)

For you--no deduction.
posted by hexatron at 2:30 PM on January 31, 2008


I believe that's only if your total medical costs are above 7.5% of your income, and you may only deduct costs after the 7.5% has been met. In this particular case, I don't think you'll qualify.
Assuming you work 40 hours a week and that you get paid vacation time, you make about $58,000 a year. 7.5% of that amount is around $4,300.
You're paying $2,100 for your health insurance over the year, which is about half of the 7.5% you'll need to deduct medical expenses.
If you don't have more than $2,200 in other qualifying medical expenses, you can't deduct.
Also, paying $175 for health care is well worth your money, even if you're being taxed. Their stipend of $2500 has $400 built into it that you're not paying towards your insurance. Would you be taxed more than $400 total on $2500? That's another way to think about it.
To give you my real-life example: I paid over $200 a month, pre-tax, at my last job. Now that I'm on COBRA, I pay over $500 a month. If I didn't really, really need the health care, I'd be in a pickle. It could suck a lot more, I guess is what I'm saying.
posted by k8lin at 2:33 PM on January 31, 2008


Hmm. I stand corrected.

Here comes the derail...So you accounting types are saying that post-tax healthcare expenses are not deductible until you reach a certain threshold? My premiums come out of my salary and are pre-tax, so I obviously don't deduct them. Does my company pay tax on them?
posted by uaudio at 2:50 PM on January 31, 2008


uaudio, that's the screwed up part of the US health care system (well, one of many). Employers don't have to pay taxes on money spent on healthcare expenses for their employees. Reference.
posted by 0xFCAF at 3:10 PM on January 31, 2008


Are your wages being reported on a W-2 or a 1099? If it's the later, e.g., you are an independent contractor, you might be able to deduct 100% of your medical expenses, including the insurance premiums. Details here.
posted by jamaro at 3:26 PM on January 31, 2008


In the State of the Union earlier this week, Bush asked Congress to amend the the tax code to allow individuals to deduct from their taxes money they spend on health insurance premiums. That change would erase the financial disparity between individual-purchased health insurance and employer-purchased health insurance.

If it passes this year, you would be able to deduct money spent on premiums and you'd be in the same position you were in at your old job (though probably with more paperwork to fill out at tax time). But this has been proposed before, a lot, and it's never passed, so we'll see whether anything actually comes of it. You could, if this legislation seems like a good idea to you, call or write to your member of Congress (or possibly the member of Congress who represents your employer's district in VA, since you're also lucky enough live in DC where we have taxation without representation) to ask them to support it.
posted by decathecting at 7:50 AM on February 1, 2008


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