When Can I Deduct Health Insurance Premiums from My Taxes?

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Health insurance is one of the most important types of personal insurance coverage. But even if you get coverage through your employer, the Affordable Care Act (ACA) marketplace, or a health insurance company, premiums can be expensive.

You can deduct your health insurance premiums and other health care expenses from your income, which will reduce the amount you owe the IRS come April.

Is Health Insurance Tax Deductible?

Health insurance premiums are tax deductible, but they depend on how much you spent on health care throughout the year and whether you are self-employed.

The rules are different if you’re self-employed compared to an employee, says Claire Hunsaker, founder of AskFlossie, a women’s financial group. If you are self-employed and pay the full cost of your health insurance, you can deduct your income.

“Auto insurance premiums are deducted as ‘above the line’ on Form 1040, which means you can deduct the amount even if you don’t deduct it on Schedule A,” says Hunsaker.

The rules are even stricter if you are a W-2 employee. You can deduct the out-of-pocket portion of your employer-sponsored health insurance if you take a deduction on your taxes. And even then, “those payments are deductible to the extent that they and other medical expenses exceed 7.5% of Adjusted Gross Income (AGI),” says Hunsaker.

Here’s how the tax deduction works for different types of health insurance.

Employer-sponsored health insurance

For many people, their portion of employer-sponsored health insurance is insufficient to be deducted from their income. Most group insurance premiums are covered by your employer and business premiums. The rest comes from your salary, tax-free.

“If you are deducting your employer-provided insurance premium before tax, it is already being deducted from your income. Therefore, you will not be allowed to ‘double dip’ by adding them as medical deductions on Schedule A of Form 1040,” said Kristie Adams, CPA and regional director of tax and business services at Buckingham Advisors, an Ohio-based financial advisory firm.

ACA marketplace plans

ACA marketplace plans, purchased through a state or federal exchange at Healthcare.gov, are tax-deductible. This can benefit self-employed people who cannot get employer-sponsored insurance or insurance through their spouse.

For self-employed people, however, this is not technically excluded. It is the change in your income.

When you have health insurance through the ACA marketplace, you use tax dollars to pay for it. As a result, anyone with ACA coverage can claim all of their annual health insurance premiums against their income, using Form 1040.

There are exceptions:

  • If you get health insurance through an employer-sponsored health insurance plan and reduce the full coverage, you don’t have to deduct your ACA insurance premiums from your income.
  • If you qualify for ACA tax credits that are available on the market, they will affect how much money you can take out on your taxes. If you receive a subsidy that pays 70% of your health insurance, you may be allowed to deduct 30% of the cost from your taxes.

COBRA insurance plans

COBRA insurance premiums are tax-deductible as medical expenses because you pay them out of pocket without the help of your employer. But you can deduct that cost if COBRA premiums and other medical expenses exceed 7.5% of your AGI and you take the deduction.

Although you are responsible for paying all COBRA premiums, you cannot deduct the full amount from your income, as you can with ACA marketplace insurance premiums.

Short term health insurance

In most cases, you can deduct the cost of short term insurance as a medical expense. Short term insurance premiums are paid out of pocket using tax dollars, so if you deduct the premiums and your total annual medical expenses are more than 7.5% of your AGI, you may be able to claim a deduction.

What Medical Expenses Are Tax Deductible?

Most people don’t know that certain expenses can be deducted from your federal income tax. In addition to your health insurance premiums, other medical deductibles may include:

  • Term insurance premiums
  • Dental insurance premiums
  • Vision insurance premiums
  • Preventative treatment
  • Treatment of other diseases
  • Essential equipment for the disabled
  • Mental health services
  • Travel and accommodation expenses for medical appointments

It is important to remember that you can deduct eligible 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 premiums paid by health plans or employers.

Hunsaker explains that these tax breaks can be powerful for people with disabilities or chronic illnesses or who experience major medical events. But the discount is difficult for those who go to the doctor several times a year for necessary and preventive care.

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

“That means you can deduct the first $5,064 and, if you meet the requirements, it’s reasonable to deduct,” says Hunsaker.

Medical expenses that are not tax deductible

The money must be for medically necessary drugs or equipment that needs to be removed. This means that you cannot withdraw funds such as:

  • Addictive drugs
  • Cosmetic surgery
  • Nicotine gum and patches do not require a prescription
  • Health promotion programs

Is Supplemental Health Insurance Tax Deductible?

Health insurance supplements, such as medical insurance and critical illness insurance, are often tax-deductible, but only as qualified medical expenses.

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

Is COBRA Health Insurance Tax Deductible?

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

But like most types of health insurance, COBRA payments are considered medical expenses and can be deducted if you take out your income and your medical expenses are more than 7.5 percent of your AGI annually.

Are Health Savings Accounts Deductible?

Health savings accounts (HSAs), linked to low-cost health plans, are tax-deductible, even if you take the appropriate deductions.

“If you have a very low-cost health plan, you may be eligible to exclude HSA contributions from your gross income, depending on how you enroll and what your circumstances are,” says Adams.

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

In 2023, the maximum HSA contribution will be $3,850 for individuals and $7,750 for families.

When Should You Take a Deductible Instead of a Regular Deduction?

Taking the deduction may make sense if you have a lot of medical or dental expenses that you didn’t pay back during the tax year. But remember that the amount must exceed 7.5% of your AGI, plus your itemized deductions, to qualify.

For 2022, a discount standard for single taxpayers it is $12,950 and $25,900 for joint filers.

Let’s look at an example. Assume your AGI for the tax year is $90,000. You were diagnosed with cancer and the combined treatment, surgeries, drugs and hospital stay cost $150,000. In this case, it may make sense to take the deduction because the cost of support can exceed 7.5% of your AGI and is greater than the current deduction.

On the other hand, imagine that you had the same AGI for the taxable year but only earned $5,000 in non-reimbursed medical expenses for the year. In this case, taking your expenses would be a good way to reduce your income because your medical expenses cannot exceed 7.5% of your AGI.

Remember that you can only deduct qualified medical expenses – if you earn thousands of dollars or more in medical expenses but don’t meet the requirements, taking the qualified deduction may be a better option.

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