When Can I Deduct Health Insurance Premiums on My Taxes? – Forbes Advisor


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Health insurance is one of the most important coverage types in your insurance portfolio. But whether you get coverage through your employer, the Affordable Care Act (ACA) marketplace or a private health insurance company, the premiums can be costly.

You might be able to deduct your health insurance premiums and other health care costs from your taxable income, which can lower the amount of money you owe the IRS come April.

Is Health Insurance Tax Deductible?

Health insurance costs may be tax-deductible, but it depends on how much you spent on medical care for the year and whether you’re self employed.

The rules are different if you’re self-employed compared to an employee, says Claire Hunsaker, founder at AskFlossie, a financial community for women. If you’re self-employed and pay all your health insurance premiums, you can deduct the cost from your taxable income.

“Self-employed health insurance premiums are deductible as an ‘above the line’ deduction on Form 1040, which means you can deduct the premium even if you don’t itemize deductions on Schedule A,” says Hunsaker.

The rules are much stricter if you’re a W-2 employee. You can only deduct the out-of-pocket portion of your employer-sponsored health insurance premium if you take the itemized deduction on your tax return. And even then, “the premiums can only be deducted to the extent that they and other medical costs exceed 7.5% of your Adjusted Gross Income (AGI),” says Hunsaker.

Here’s how tax deductions work for various types of health insurance.

Employer-sponsored health insurance

For most people, their portion of employer-sponsored health insurance premiums aren’t enough to get deducted from taxable income. Most group health insurance premiums are subsidized by your employer and the business pays a large portion of the cost. The rest comes out of your paycheck, tax-free.

“If you are deducting employer-sponsored health insurance premiums on a pre-tax basis, it is already being deducted from your taxable income. Therefore, you wouldn’t be allowed to ‘double dip’ by adding them as a medical deduction on Schedule A of Form 1040,” says Kristie Adams, CPA and regional director of tax and business services for Buckingham Advisors, an Ohio-based financial advisory firm.

ACA marketplace plans

ACA marketplace plans, purchased through a state or the federal exchange at Healthcare.gov, are tax deductible. This can benefit self-employed individuals who can’t get employer-sponsored health insurance coverage or insurance through their spouse.

For self-employed people, however, this isn’t technically a deduction. It’s an adjustment to your taxable income.

When you have medical insurance through the ACA marketplace, you use pre-tax dollars to pay the premiums. As a result, anyone who has ACA coverage can deduct the full cost of their annual health insurance premium on their taxable income, using Form 1040.

There are exceptions:

  • If you get health insurance through your spouse’s employer-sponsored group health insurance plan and decline comprehensive coverage, you’re not eligible to deduct your ACA health insurance premiums from your taxable income.
  • If you qualify for ACA premium tax credits found in the marketplace, it will impact how much money you can deduct on your taxes. If you receive a subsidy that pays for 70% of your health insurance premium, you would only be allowed to deduct the 30% you pay on your taxes.

COBRA insurance plans

COBRA insurance premiums are eligible for a tax deduction as a medical expense because you pay the premiums out-of-pocket without help from an employer. But you can only deduct the cost if the COBRA premiums and your other medical expenses exceed 7.5% of your AGI and you take the itemized deduction.

Though you’re likely responsible for paying all of the COBRA premiums, you can’t automatically deduct the full amount from your taxable income, like you can with ACA marketplace insurance premiums.

Short-term health insurance

You can usually deduct the premiums for short-term health insurance as a medical expense. Short-term health insurance premiums are paid out-of-pocket using pre-tax dollars, so if you take the itemized deduction and your total annual medical expenses are greater than 7.5% of your AGI, you can claim the deduction.

What Medical Expenses are Tax Deductible?

Many people aren’t aware that some expenses can be deducted from your federal income taxes. Besides your health insurance premiums, other deductible medical expenses may include the following:

  • Long-term care insurance premiums
  • Dental insurance premiums
  • Vision insurance premiums
  • Preventive medical care
  • Treatments for certain diseases
  • Equipment needed for a medical disability
  • Mental health services
  • Travel and lodging expenses for medical appointments

It’s important to remember that you can only deduct the cost of qualifying medical expenses if the total amount you paid exceeds 7.5% of your AGI and you choose to itemize your deductions. You can’t deduct the amount paid for by a health plan or employer.

Hunsaker explains that this tax deduction can be powerful for people with disabilities or chronic illnesses or who experience major medical events. But the deduction is hard to claim for those who visit the doctor only a few times per year for basic and preventive care.

Here’s why: The 2020 U.S. Census says the median household AGI is $67,521 and 7.5% of that is $5,064.

“That means you can only deduct expenses after the first $5,064 and, if you meet the criteria, it makes sense for you to itemize deductions,” Hunsaker says.

Medical expenses that aren’t tax-deductible

The expenses must be for medically necessary treatments or equipment to claim the deduction. That means you can’t deduct costs like:

  • Over-the-counter drugs
  • Cosmetic surgery
  • Nicotine gum and patches that don’t require a prescription
  • General health improvement programs

Is Supplemental Health Insurance Tax Deductible?

Supplemental health insurance premiums, like hospital indemnity insurance and critical illness insurance, are generally tax deductible, but only as a qualified medical expense.

You can deduct the cost if the total cost of your medical expenses and supplemental health insurance premiums exceeds 7.5% of your AGI and you take the itemized deduction.

Is COBRA Health Insurance Tax Deductible?

You can deduct the cost of COBRA health insurance on your federal income taxes.

But as with most types of health insurance, COBRA premiums are considered a medical expense and can only be deducted if you itemize your deductions and your medical expenses are greater than 7.5% of your AGI for the taxable year.

Are Health Savings Accounts Tax Deductible?

Health savings accounts (HSAs), connected to high-deductible health plans, are tax-deductible, even if you take the standard deduction.

“If you are covered under a high-deductible health plan, you may qualify to exclude your HSA contributions from your gross income, depending on your filing status and personal circumstances,” says Adams.

For 2022, the maximum HSA contribution is $3,650 for individuals and $7,300 for families. Individuals over age 55 can contribute an additional $1,000 per year as a “catch-up” contribution.

For 2023, the maximum HSA contribution will be $3,850 for individuals and $7,750 for family coverage.

When Should You Take An Itemized Deduction Rather Than Standard Deduction?

Taking the itemized deduction may make sense if you had many unreimbursed medical or dental expenses during the taxable year. But keep in mind that those expenses must exceed 7.5% of your AGI, as well as the standard deduction for your filing status, to reap the benefits.

For 2022, the standard deduction for a single taxpayer is $12,950 and $25,900 for joint filers.

Let’s look at an example. Imagine that your AGI for the taxable year is $90,000. You were diagnosed with cancer and the combination of treatment, surgeries, medication and hospital stays cost $150,000. In this case, it would make sense to take the itemized deduction because the cost of treatment would well exceed 7.5% of your AGI and is greater than the current standard deduction.

On the other hand, imagine that you had the same AGI for the taxable year but only accrued $5,000 in unreimbursed medical expenses for the year. In this case, taking the standard deduction would be a better way to lower your taxable income because your medical expenses would not exceed 7.5% of your AGI.

Remember that you can only deduct qualifying medical expenses—if you accrue thousands of dollars or more in medical expenses but they don’t meet the requirements, taking the standard deduction would still be the better option.

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