Tax Aspects of Keeping a Child Under Age 27 on Your Health Insurance

One of the provisions of the Patient Protection and Affordable Care Act is that children can remain on their parents' health care coverage until they are 26 years old. According to the law, children can remain on their parent's coverage even if they are married, not living with their parents, attending school, not financially dependent on their parents, or if they are working and eligible to participate in their employer's health care plan. So there are really no restrictions and each family can determine what is most advantageous in their particular case.

Tax benefits are also available for this extension of coverage for dependents. According to the IRS, the cost of health care coverage for an employee's child that is paid by the employer is excluded from the employee's taxable income through the end of the taxable year in which the child turns 26. So even though the Affordable Care Act provides that coverage must be extended to children until they reach age 26, the exclusion from tax of the cost of that coverage continues until the end of that year.

Reimbursements that an employer makes directly or indirectly to employees for the medical care of the employees, their spouses and dependents are generally excluded from the employees' income. This includes reimbursements for medical expenses of adult children who have not attained age 27 by the end of the tax year, regardless of whether the child qualifies as the employee's dependent.

Also, the amount that employees pay for the extended coverage for children through a cafeteria plan at work is on a pre-tax basis. So employees are not taxed on the income they use to pay for their adult children's health care coverage.

As indicated by the IRS, people who are self-employed can include the cost of health coverage for an adult child in their self-employed health insurance deduction. This also applies until the end of the year in which the child turns 26. And the cost of the coverage can be included even if the child does not qualify as a dependent.

The self-insured health insurance deduction is claimed as an adjustment to gross income on Form 1040 or 1040NR. It should be noted that in 2011 the net self-employment income on Schedule SE can no longer be reduced by the amount of the self-employed insurance deduction.

The IRS points out that coverage and reimbursement of medical expenses under flexible spending arrangements (FSAs) and health reimbursement arrangements (HSAs) can include children who are under age 27 at the end of the tax year.

As pointed out by CCH, an itemized deduction can be claimed for the medical expenses of an adult child under age 27, whether or not the child is a dependent. Previously the child had to be under age 19 or under age 24 and a full-time student. This deduction could include co-payments, deductibles and any qualifying medical expenses not covered by insurance. This provides a tax benefit if itemizing instead of claiming the standard deduction and deductible medical expenses exceed 7.5% of adjusted gross income. The 7.5% threshold is scheduled to increase to 10% in 2013.

Sources:

2011 Instructions for Schedule SE (Form 1040), IRs

Publication 535, Business Expenses, IRS

Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, IRS

Sandwich Generation and Health Care: CCH Reviews Tax Ramifications for Caring for Aging Parents and Young Adult Children, CCH

Tax-Free Employer-Provided Health Coverage Now Available for Children under Age 27, IRS