Are U.S. Income Taxes Paid on Health Insurance?

Taxpayers often wonder if health insurance is subject to income tax.

Under the Internal Revenue Code, taxes must be paid on income "from any source derived." That definition of taxable income is quite broad; however, there are exceptions to the rule and some benefits that taxpayers receive during the year are not subject to income tax. Health insurance is a benefit that many U.S. workers receive to supplement their wages.

History

The first income tax in the United States was enacted in 1861 to as a way to fund the Civil War. The 16th Amendment to the Constitution, ratified in 1913, allowed for a broader income tax that the federal government could expend for general purposes.

Features

Although the Internal Revenue Code requires taxes to be paid on income and revenue from many sources, U.S. law does not tax the value of a health insurance benefit provided to an employee by her employer.

Benefits

The primary advantage of employer-paid health insurance not being taxed is that a taxpayer obtains something of value that would be fully taxable if paid in cash or a cash equivalent.

Considerations

Some employees willingly accept a reduction in wages or salary as a trade-off for employer-paid health insurance because such an arrangement works to their financial benefit.

Proposed Changes

Legislation has been proposed in that would require taxpayers to pay federal income tax on health insurance benefits at some undetermined future date.

References

• Internal Revenue Code: Income Taxes
• New York Times: Administration Is Open to Taxing Health Benefits
• Cornell Law School: Income Tax Law -- An Overview