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George Saenz, the Tax Talk columnistHealth-care help set up incorrectly

Dear Tax Talk,
We have group health insurance available at my work. My employer offers employees full coverage. He pays $304 a month per employee. We can add our family but it was way too much. I opted to stay with my current health care, which I can afford.

In turn my employer agreed to put $152 per pay period on my paycheck to go toward my own health insurance. By doing this he added it to my gross income, which means that not only am I being taxed on this money, it looks like this affects my return. Can I subtract this money from my adjusted gross income and take it as a credit?
-- Jeff

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Dear Jeff,
It clearly affects your return as it is additional income included in your Form W-2. You and your employer are the victims of being ill-advised. The employer is paying payroll taxes unnecessarily, and you're paying payroll and income taxes unnecessarily. But this is happening because you're both going about it all wrong.

An employer can establish a health reimbursement arrangement that is tax-free to the employee and on which the employer also avoids payroll taxes. An HRA is like a cafeteria plan, but less formal. However, there are some important rules that an employer must follow regarding discrimination in favor of highly compensated or key employees and qualified reimbursements so that the arrangement is respected by the Internal Revenue Service. Health savings accounts and other tax-favored health plans are discussed in Publication 969.'s corrections policy-- Posted: Feb. 7, 2006
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