Pretax and after-tax are two ways to pay for medical insurance premiums. While both methods may be offered by employers, if you pay for insurance privately outside of your employment you are paying with after-tax dollars. Each method also has potential tax benefits. Depending on which way you pay for insurance, you could either recognize the benefit in your paycheck or on your tax return.
Pre-Tax Premium Payments
The option to pay for medical insurance pretax is a benefit offered by employers. When you pay for something pretax, the money you use to pay the premium is not taxed. Your employer calculates your gross earnings for the pay period, then subtracts the amount of your insurance premium. Your employer uses the result to calculate the tax on your earnings. Since your medical premium has already been subtracted from your income, you don’t pay tax on the insurance payment.
After-Tax Premium Payments
Opposite of pretax insurance payments, after-tax premium payments are paid with money you pay tax on. If you pay for after-tax insurance through payroll deduction, your employer calculates the tax due on your total gross earnings, then subtracts the amount of your insurance premium. Since the money to pay the premium is included in the taxable wage calculation, you pay tax on the premium payment. You also pay for premiums after-tax if you pay for a private policy.
If you pay for premiums after-tax, you may be eligible to deduct the amounts you pay during the year on your tax return. You are not eligible for the deduction if you pay for the insurance pretax since you don’t pay tax on the money you use to pay for the plan. If you were able to take a deduction for pretax payments, you would receive the double benefit of not paying tax on the money used to pay the premiums, plus a deduction for the premiums on your return. The IRS does not allow you to do this.
Itemized Deductions and Limitations
The medical expense deduction allowed on your return is an itemized deduction, which is a special tax-deduction category. The IRS allows each person who files a return to claim either a standard deduction, which is a flat amount based on your filing status, or itemized deductions, which detail the specific amounts you pay for things like mortgage interest, donations to charity, taxes and medical expenses. However, most people don’t automatically qualify to take a medical expense deduction just because they have after-tax expenses. This is because the medical expense deduction category is subject to a 10 percent adjusted gross income limitation, which means you can deduct medical expenses only to the extent they exceed 10 percent of your income. For instance, if your income for the year is $25,000, you would be able to deduct eligible medical expenses that exceed $2,500.
- IRS: Publication 17 -- Your Federal Income Tax: Insurance Premiums
- IRS: Publication 15 -- Employer's Tax Guide: Health Insurance Plans
- Colorado.gov: What Do Pre-Tax and After-Tax Mean?
- IRS. "Topic No. 502 Medical and Dental Expenses." Accessed Oct. 17, 2020.
- IRS. "Publication 502 Cat. No. 15002Q: Medical and Dental Expenses (Including the Health Coverage Tax Credit): For Use in Preparing 2017 Returns." Pages 2-3. Accessed Oct. 17, 2020.
- Congressional Research Service. "Individual Tax Provisions (“Tax Extenders”) Expiring in 2020: In Brief." Page 8. Accessed Oct. 16, 2020.
- IRS. "Definition of Adjusted Gross Income." Accessed Oct. 17, 2020.
- IRS. "Employee Benefits." Accessed Oct. 17, 2020.
- Tax Policy Center. "How Does the Tax Exclusion for Employer-Sponsored Health Insurance Work?" Accessed Oct. 17, 2020.
- IRS. "Publication 535 Cat. No. 15065Z: Business Expenses: For Use in Preparing 2019 Returns." Page 23. Accessed Oct. 17, 2020.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.