For some Americans, health insurance is one of their most major monthly costs, prompting them to ask what medical expenses are tax-deductible in order to minimize their payment. As healthcare expenses climb, some customers look for ways to save money by receiving tax benefits on their monthly health insurance payments.
Your premiums may already be tax-free if you are enrolled in an employer-sponsored health insurance plan. If you pay your premiums via a payroll deduction plan, they are most likely done using pre-tax monies, therefore you cannot claim a year-end tax deduction.
However, if your overall healthcare expenditures for the year are high enough, you may still be eligible to claim a deduction. Self-employed people may be able to deduct their health insurance premiums provided they satisfy certain conditions. This article will go through tax-deductible medical costs, as well as the qualifying conditions.
- Health insurance premiums, the amount paid upfront in order to keep an insurance policy active, have been steadily increasing as the cost of healthcare has increased in the United States.
- When the Affordable Care Act was passed by President Barack Obama in 2010, it allowed certain families to access premium tax credits on their health insurance plans.
- If you are enrolled in an employer-sponsored plan and your premiums are made through a payroll deduction, they are likely made with pre-tax dollars, and you would not be allowed to claim a year-end tax deduction.
- You can deduct your health insurance premiums—and other healthcare costs—if your expenses exceed 7.5% of your adjusted gross income (AGI) (AGI).
- Individuals who are self-employed and satisfy certain conditions may be eligible to deduct their health insurance premiums even if their costs do not exceed the 7.5% limit.
Tax Deductions Vs. Tax Credits
Understanding Health Insurance Premiums
Health insurance premiums, or the amount paid up front to keep an insurance coverage active, have been continuously rising in tandem with rising healthcare expenditures in the United States. Premiums are the “maintenance charge” for a healthcare coverage, excluding other payments that customers must make, including as deductibles, co-pays, and other out-of-pocket expenses.
When President Barack Obama signed the Affordable Care Act into law in 2010, it gave eligible families access to premium tax credits on their health insurance plans, alleviating some of the costs of soaring health insurance rates.
According to the Kaiser Family Foundation, a non-profit organization that focuses on healthcare problems in the United States, nearly half of all Americans get health insurance via their employment.
If your medical premiums are taken via a payroll deduction plan, you’re almost certainly paying your portion of the insurance premium using pre-tax cash. So, if you deducted your premiums at the end of the year, you’d be deducting the same expenditure twice.
Deductions for Qualified Unreimbursed Healthcare Expenses
However, if you buy health insurance on your own using after-tax cash, you may be able to deduct part of your payments. For the tax years 2021 and 2022, you may deduct eligible unreimbursed healthcare expenditures incurred for yourself, your spouse, or your dependents if they exceed 7.5% of your adjusted gross income (AGI).
AGI is a change in your gross income. It includes all of your sources of income—wages, dividends, spousal support, capital gains, interest income, royalties, rental income, and retirement distributions—minus any number of allowable deductions from your income, such as retirement plan contributions, student loan interest payments, losses incurred from the sale or exchange of property, and financial institution early-withdrawal penalties, among others.
This deduction applies to health insurance premiums as well as any out-of-pocket payments for items like medical visits, surgeries, dental treatment, eye care, and mental healthcare. However, only costs that surpass 7.5% of your AGI are deductible.
How to Calculate Your Healthcare Deductions
For example, suppose your adjusted gross income for the year was $50,000. Because 7.5 percent of that amount is $3,750, all eligible costs in excess of that amount are deducted. If you have $6,000 in total medical expenditures, including premiums, you may deduct $2,250 from your taxable income. When calculating your expenditures, make sure you don’t include any reimbursed charges, such as premium tax credits. Individuals who acquired their insurance via the Health Insurance Marketplace, popularly known as “The Marketplace,” may be eligible for premium tax credits.
The Marketplace is a website where individuals, families, and small companies may buy health insurance. It was established in 2010 as a consequence of the Affordable Care Act to ensure maximum compliance with the requirement that all Americans have some type of health insurance. If you buy health insurance via the exchange, you may be eligible for income-based government subsidies to help offset the cost of exchange premiums. According to the HealthCare.gov website, if your estimated income is between 100% and 400% of the federal poverty line for your family size, you are eligible for a premium tax credit.
It would be helpful if you also excluded any expenditures paid for by your insurance company or your work. You must itemize your deductions rather than taking the standard deduction to deduct medical expenditures. As a result, before making this option, be sure that your total itemized deductions surpass the standard deduction amount.
For tax year 2021, the standard deduction is $12,550 for individuals and $25,100 for married couples filing jointly; for tax year 2022, the standard deduction is $19,950 for individuals and $25,900 for married couples filing jointly.
Medical Expense Deductions for the Self-Employed
Individuals who manage their own enterprises are exempt from the 7.5% rule. Among the numerous additional tax advantages and deductions available to self-employed persons is the ability to deduct all premium payments from your adjusted gross income, regardless of whether you itemize your deductions. However, you may be barred from using this deduction if you are:
- Eligible to enroll in another employer’s plan but choose not to do so
- You are self-employed, but you also have another work that provides a health coverage.
- Eligible for coverage under a spouse’s employer-sponsored plan.
Self-employed persons face additional restrictions dependent on the quantity of their company revenue. A self-employed individual cannot deduct more than the money generated by their company activities in any given year. Individuals who own more than one company may only designate one of them as the health insurance plan sponsor; you cannot combine the revenue from various businesses to claim the maximum deduction. In the case of self-employed individuals, it may be in their best interests to choose their most successful company as the plan sponsor in order to maximize their prospective tax benefit.
The deduction for self-employed people is a write-off on personal income taxes; it is not deducted when they file on behalf of any of their company activities. In the instance of a lone owner, for example, the amount of the deduction would be entered on Form 1040 rather than Schedule C, better known as “Profit or Loss from Business.”
Other Ways to Lower Your Tax Bill
If you are unable to deduct your health insurance premiums because you do not reach the cost threshold or want to accept the standard deduction while filing your taxes, there are alternative options to lower your total medical expenditures.
As a sort of insurance, you may want to explore a high-deductible health plan (HDHP). HDHPs often have cheaper premiums than other types of plans. They also provide the option for plan users to create a Health Savings Account (HSA), a tax-advantaged savings account. Contributions to an HSA account may be used to cover out-of-pocket healthcare costs. Contributions to an HSA are tax-deductible, and withdrawals are tax-free if utilized for qualified expenditures.
By choosing an HDHP, you are shifting a greater portion of your total medical expenditures to a savings account with additional tax advantages. The higher your tax bracket, the more money you may save by using an HDHP. The IRS defines an HDHP as an individual insurance coverage with a deductible of at least $1,400 or a family policy with a deductible of at least $2,800 for tax years 2021 and 2022.
COBRA and HSA Funds
In certain cases, you may be able to use your HSA savings to pay for health insurance premiums as well. This means that your premiums would be paid using pre-tax cash as well. One circumstance in which this may happen is if you briefly continue on your old employer’s plan.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) established a provision that allows qualified individuals to keep group coverage for up to 18 or 36 months (depending on the scenario) after leaving your job or becoming ineligible for insurance coverage through your employer-sponsored plan due to working fewer hours.
The American Rescue Plan, enacted by President Biden on March 11, 2021, temporarily reduced the cost of purchasing insurance under COBRA. Under typical conditions, a taxpayer who enrolls in COBRA may be required to pay at least 102% of the premium cost. However, under this new law, the government reimbursed the whole COBRA price for anyone who lost their jobs or had their hours reduced from April 1 to September 30, 2021.
Whereas most companies that provide health insurance will pay a portion of your premiums, when you enroll in COBRA, you will normally be responsible for contributing the whole amount of your premiums. If you had an HDHP with an HSA through your workplace before choosing COBRA coverage, you usually have the option of bringing your HSA account with you and continuing to contribute to it. While your premiums may be higher in this situation, you will have the benefit of paying them with pre-tax cash.
If you get unemployment benefits, you may pay your premiums using pre-tax cash if you are enrolled in an HDHP and have an HSA account.
Limitations of an HDHP
While an HDHP may provide certain tax advantages, it is not always the best healthcare option for everyone. If you have a pre-existing medical condition or anticipate substantial healthcare costs in the next year, you may want to choose a plan that provides more comprehensive coverage.
Because of the qualities of an HDHP, they are normally only suggested for those who do not anticipate needing healthcare coverage unless in the event of a major health emergency. During the open enrollment period, you should carefully consider your choices to choose the plan that best matches your requirements.
What Medical Costs Are Tax-Deductible?
Payments to physicians, dentists, surgeons, inpatient hospital care, acupuncture treatments, participation in weight-loss programs, and other medical expenses are all tax deductible. On its website, the Internal Revenue Service provides a list of instances of deductible medical costs.
What Medical Expenses Are Not Tax Deductible?
Funeral or burial fees, nonprescription drugs, toothpaste, toiletries, cosmetics, and other items are examples of non-deductible medical expenditures.
Are Health Insurance Premiums Tax Deductible?
You may deduct eligible unreimbursed healthcare expenditures paid for yourself, your spouse, or your dependents for the 2020 and 2021 tax years, but only if they exceed 7.5% of your adjusted gross income (AGI).Furthermore, self-employed individuals may deduct premiums even if their AGI does not reach 7.5%.
What Is a Qualified Medical Expense?
A qualifying medical cost is one that may be deducted on an annual income tax return as a medical expense, such as doctor’s visits, lab tests, and hospital stays.
Can I Claim Medical Expenses on My Tax Return?
It all depends. You may deduct only eligible medical costs that exceed 7.5% of your adjusted gross income. Schedule A calculates the amount you may deduct (Form 1040).
The Bottom Line
If you are enrolled in an employer-sponsored plan, your premiums are almost certainly already tax-deductible. However, under some conditions, you may be eligible to claim a tax benefit when purchasing your insurance plan.
For example, if your overall healthcare expenditures surpass 7.5% of your AGI or if you are self-employed, you may deduct the amount you spent on health insurance premiums. In the latter instance, you may be able to deduct the whole amount spent on premiums (as long as it does not exceed your company revenue).
Investopedia does not provide tax, investment, or financial advice. Readers should consult with a certified tax advisor to identify the best tax approach for their unique circumstances.
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