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George Saenz, the Bankrate.com Tax Talk columnist Deductible COBRA payments

Dear Tax Talk,
I am self-employed. My husband was laid off recently and we received COBRA paperwork. COBRA coverage for both of us amounts to about $575 a month and the plan covers most expenses. My husband recently got a new job where so-so insurance is offered at a cost to us of about $500 a month ($80 a month is paid by his employer). From what I understand, if we choose the COBRA plan we will not be able to deduct it on our taxes because his company is offering us insurance, even though it is not as good and costs only slightly less. Is this true? Thank you.
-- Heather

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Dear Heather,
COBRA payments remain deductible even if you decline employer-offered health insurance. The COBRA costs would be considered medical expenses that you can claim on Schedule A as itemized deductions.

However, medical expenses are only deductible when they exceed 7.5 percent of your adjusted gross income, or AGI. Therefore you may not get any tax benefit for the COBRA payments, especially if you have high income or do not otherwise itemize deductions.

If you're not receiving any tax benefit, the after-tax cost of the COBRA will be substantially more than $575.

For example, assume that when you add up all your income taxes and payroll taxes, they're more than 25 percent. In that case, to pay that $575 a month you'll need to earn $800 so that after tax you're left with $575. If your husband's employer provides the employee match of $500 under a cafeteria plan so that it's tax-free, you'll be better off accepting the employer's coverage.

Alternately, if you can convince the new employer to reimburse you for the COBRA coverage under a salary reduction plan, the reimbursement would be tax-free. From experience, I know employers are not thrilled about more paperwork, so try to see it from their point of view.

Bankrate.com's corrections policy-- Posted: May 1, 2007
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