How
are my FEHB insurance premiums taxed without Premium Conversion?
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You receive a salary and then your
contribution to pay for FEHB coverage is withheld (post-tax). You pay tax on the salary received -- the
amount before the health insurance premium is withheld. Thus, you pay tax on
a larger amount of income.
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How much money will I save?
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Based on information from the
Department of the Treasury, the average Federal employee who participates in the FEHB Program will save $434 per year in Federal income, Social Security and Medicare taxes. In most jurisdictions, state and local income taxes also will be reduced.
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How do I figure out my savings?
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The quickest way to determine the
amount of money you will save yearly is simply to calculate (separately or
combined) the tax rate multiplied by the total amount of health insurance
premiums. These examples show the
savings for a typical employee in the 28% tax
bracket:
|
Self Only |
Self and Family |
Yearly FEHB premium: |
$700.00 |
$1,600.00 |
Federal income tax savings |
$196.00 |
$448.00 |
FICA tax savings (7.65%) |
$53.55 |
$122.40 |
Annual Savings |
$249.55 |
$570.40 |
These examples do not
include savings on state and local taxes.
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Are my state and local taxes reduced by premium conversion?
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Yes, taxes in 49 states and most
localities will be reduced; exceptions include the state of New Jersey and
the Commonwealth of Puerto Rico. OPM monitors changes in state and local tax regulations, and
provides guidance to your agency as needed. Regardless
of where you live, FEHB premiums are not subject to Federal taxes.
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FICA Taxes
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If you are covered by the Federal Employees Retirement System (FERS) and participate in premium
conversion, FEHB premium deductions will also be excluded from gross pay
before Old-Age, Survivors, and Disability Insurance (OASDI) and Medicare
taxes are applied. Employer FICA
contributions will also be reduced in concert with the decrease in employee
withholdings.
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Are my taxes avoided or
simply deferred? Won't I owe the IRS
money come next April?
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Taxes are avoided, not deferred. Premium conversion eliminates the taxes
you pay on the part of your salary that pays your FEHB premiums. Since your taxable income is lower with
premium conversion, the amount you owe in taxes is reduced. You won't owe the IRS money in April
because of premium conversion.
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What impact
does premium conversion have on my ability to deduct my FEHB premiums as a
medical deduction on my income tax return?
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If you participate in premium conversion, you are not
able to deduct FEHB premiums as a medical deduction on your income tax
return. That is because you are no
longer paying the premium--it's being paid by your employing agency.
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How will premium
conversion affect the amount I receive under the Earned Income Tax Credit
(EITC)?
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Premium conversion does not affect your EITC. The EITC is based on Total Earned Income
(TEI), which includes both taxable and nontaxable earned income. Taxable earned income includes money
earned as wages, salaries and tips while nontaxable earned income includes
salary deferrals and reductions.
Premium conversion falls under the category of nontaxable earned
income because salary is reduced by an amount equal to a health insurance premium
payment and a health insurance premium is then paid with these pre-tax
dollars. The EITC amount is
unaffected by premium conversion because premium conversion shifts health
insurance premium payments from taxable to nontaxable earned income, both of which
are included in the TEI when calculating the EITC.
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