What do I do about reimbursements?

Reimbursements usually count against your medical and dental expenses. However, you generally do not have to include any payments or reimbursements for loss of earning as income. Similarly, you generally do not have to include any payments or reimbursements for the loss of, or loss of use of, a body part or body function.

Aside from those situations, if you received any other reimbursements for medical expenses, such as from your health insurance company or Medicare, you must subtract those reimbursements from your medical and dental expenses when calculating your deduction. More significantly, if you received more reimbursements than what your medical expenses actually were, you may have to include that extra reimbursement amount as income. Whether you have to report it as income, and to what extent you may have to do so, depends upon how your insurance premiums are paid for.

If you pay all of your insurance premiums (meaning your employer does not pay for any portion of your insurance), you do not have to report extra reimbursements as income on your tax return. Similarly, if your employer pays part of your health insurance premium but includes that payment/contribution as income, you do not have to report any extra reimbursement from your health insurance company as income.

However, if your employer pays a portion of your premium and does not classify it as part of your income, you must report a portion of the extra reimbursement as income. Specifically, you should determine what percentage of your total health insurance premium is paid by your employer and then that same percentage of your extra reimbursement must be reported as income. For example, if your total insurance premium for 2006 was $6,000, and your employer paid $2,000 of that, your employer paid 33% of your premium and you would therefore have to report 33% of any extra reimbursement as taxable income.

Finally, if your employer paid all of your health insurance premiums, you must report any and all extra reimbursements as income when filing your tax return.