21 Mar I got a health insurance refund. Do I include it as income on my taxes?

Q. In 2020, I took a New Jersey medical expense deduction for the insurance premiums that I paid out of pocket that year. The following year, in 2021, the insurance company refunded a part of my insurance premium. Do I include it as income in my 2021 taxes?
— Taxpayer

A. Thanks for your question.

First let’s start with medical insurance premiums and federal income taxes.

For individuals with employer health coverage, the premiums are paid with pre-tax dollars, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

He said because the premiums are paid with pre-tax dollars, they are not tax deductible for federal income tax purposes.

“However, if an individual pays out-of-pocket for their medical premiums with after-tax dollars, then the healthcare premiums are potentially deductible as an itemized medical expense subject to the 7.5% of adjusted gross income (AGI) rule for federal tax purposes,” Maye said. “This typically occurs for individuals who are not working and paying their medical premiums with after-tax dollars.”

For federal tax purposes, the refund of medical premiums is potentially income the following year depending on the circumstances, Maye said.

If the individual did not itemize and receive a tax benefit the prior year for the premiums paid then the refund is not taxable, he said. The refund could also be partially taxable if the individual received a partial tax benefit.

“For self employed individuals who deduct their premiums as a reduction of their AGI the refund is fully taxable,” he said.

Now on to the State of New Jersey.

Maye said the state of New Jersey treats healthcare premiums paid by employees differently than federal purposes.

“The state of New Jersey does not treat the employee payment of medical premiums as pre-tax dollars and includes the dollars paid as after-tax,” he said. “So while employee-paid medical premiums are pre-tax and not deductible for federal purposes, those same medical premiums may in fact be tax deductible for New Jersey purposes.”
It would seem if you received a New Jersey tax benefit for the premiums paid on your prior year New Jersey return, the insurance premium refund could be taxable for New Jersey purposes, Maye said.

“In any event, in all likelihood, we are talking about a small tax impact,” he said. “With a $1,000 premium rebate and assuming a New Jersey tax rate of 6%, that would create $60 New Jersey tax liability.”

Maye recommends you seek the help of a qualified tax professional to provide guidance on the particulars of your situation.

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This story was originally published March 21, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.