Private Health Insurance and tax

How much tax will I save if I have Private health Insurance?

This is a question I get asked a lot. People often assume that if they have health insurance then not only will they save income tax but they also won't be liable for the Medicare levy. Some private health funds market their products as magical tax-saving mechanisms guaranteed to save you thousands of Dollars at tax time. Let's look at how true these claims are.

Firstly, the income tax. Having or not having private health insurance makes no difference to your income tax calculation at all.

So, let's deal with the Medicare aspects namely the Medicare levy and Medicare levy surcharge.

Australian tax residents are subject to a Medicare levy of 2% of their taxable income unless they qualify for a reduction. Reductions are available if you earn less than $26,120 p.a. or $41,305 as a pensioner. So the vast majority of taxpayers will have to pay this 2% levy, no amount of private health insurance will change this.

On top of the standard Medicare levy is a Medicare levy surcharge that is levied on taxpayers who earn over a threshold. The surcharge rate is 1%, 1.25% or 1.5% depending on taxable income. This is the aspect of Medicare that is affected by whether or not you have private patient hospital cover. If you have suitable cover then you do not have to pay the surcharge regardlesss of your earnings level. The twist is that even if you aren't covered by appropriate health cover you only pay the surcharge if your taxable income is in one of the 3 income tiers that determine how much Medicare levy surcharge you have to pay. The income thresholds are as follows:

* The family income threshold is increased by $1,500 for each Medicare levy surcharge dependent child after the first child.

So there you have it. If you don't earn more than $90k as a single taxpayer, or $180,000 as a couple or $183,000 as a couple with 2 kids then you won't save a cent in tax or levies by having private health insurance.

Here are some examples to illustrate how these levies work.

Jack earns $75,000 and has private health cover which costs him $1,500 per annum. His colleague Stephen also earns $75,000 but has no private health cover.

Taxes and levies are the same for Jack and Stephen, as their earnings are below the $90k threshold for single taxpayers. Now, let's see what happens if they both earn $95,000 per annum.

In this example Jack doesn't have to pay the Medicare Levy Surcharge but Stephen does. Once earning above the threshold it can be advantageous to have cover but it's still going to cost you, so weigh up the surcharge savings with the cost of the insurance.

Now what if they each earn $120k pa.

In the 3rd example Jack and Stephen have exactly the same income after taxes and health insurance, but Jack has the benefit of private health cover. As you can see as taxable income increases and the Medicare levy surcharge kicks in then it becomes worthwhile to have private health insurance.

Obviously there are other considerations and each individuals circumstances differ when it comes to their medical needs and preferences but this blog deals only with the question of Will having Private Health Cover save tax?

The answer is maybe and only if you earn above the thresholds!!