When can I deduct health insurance premiums from my taxes? – Forbes Advisor | Business Insurance

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

You may be able to deduct your health insurance premiums and other health care costs from your taxable income, which may reduce the amount of money you owe the IRS beginning in April.

Is health insurance tax deductible?

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

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

“Self-employment 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,” it says. Hunsaker.

The rules are much stricter if you are a W-2 employee. You can only deduct the out-of-pocket portion of your employer-sponsored health insurance premium if you itemize on your tax return. And even then, “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, your share of employer-sponsored health insurance premiums is not enough to deduct from taxable income. Most group health insurance premiums are subsidized by your employer, with the company paying a large portion of the cost. The rest comes out of your paycheck, tax-free.

“If you’re deducting employer-sponsored health insurance premiums on a pre-tax basis, it’s already being deducted from your taxable income. So you would not 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 at Buckingham Advisors, a financial firm based in Ohio. consulting firm

ACA Marketplace Plans

ACA Marketplace plans, purchased through a state or federal exchange on Healthcare.gov, are tax deductible. This may benefit self-employed individuals who are unable to obtain employer-sponsored health insurance coverage or insurance through their spouse.

However, for self-employed people, this is not technically a deduction. It is an adjustment to your taxable income.

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

There are exceptions:

  • If you get health insurance through your spouse’s employer-sponsored group health plan and decline comprehensive coverage, you are not eligible to deduct your ACA health insurance premiums from your taxable income.
  • If you qualify for the ACA premium tax credits that are on the market, it will affect how much money you can deduct on your taxes. If you receive a subsidy that pays 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 the help of an employer. But you can only deduct the cost if your COBRA premiums and your other medical expenses are more than 7.5% of your AGI and you take the itemized deduction.

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While you’ll likely be responsible for paying all COBRA premiums, you can’t automatically deduct the full amount of your taxable income like you can with ACA Marketplace insurance premiums.

short term health insurance

You can generally deduct short-term health insurance premiums 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 exceed 7.5% of your AGI, you can claim the deduction.

What medical expenses are tax deductible?

Many people don’t know that some expenses can be deducted on their federal income taxes. In addition to your health insurance premiums, other deductible medical expenses may include the following:

  • Long-term care insurance premiums
  • dental insurance premiums
  • vision insurance premiums
  • preventive health care
  • Treatments for certain diseases.
  • Equipment needed for a medical disability
  • mental health services
  • Travel and lodging expenses for medical appointments

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

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

Here’s why: The 2020 US Census says the average AGI for a household 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 to itemize deductions,” says Hunsaker.

Medical expenses that are not tax deductible

Expenses must be for medically necessary treatment 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 do not require a prescription
  • General health improvement programs

Is supplemental health insurance tax deductible?

Supplemental health insurance premiums, such as 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.

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Is COBRA health insurance tax deductible?

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

But like 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 exceed 7.5% of your AGI for the tax 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’re covered by a high-deductible health plan, you may qualify to exclude your HSA contributions from your gross income, depending on your marital status and personal circumstances,” says Adams.

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

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

When should you take an itemized deduction instead of a standard deduction?

Taking the itemized deduction may make sense if you had a lot of unreimbursed medical or dental expenses during the tax 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 get benefits.

By 2022, the standard deduction for a single taxpayer it is $12,950 and $25,900 for joint taxpayers.

Let’s see an example. Suppose your AGI for the tax year is $90,000. He was diagnosed with cancer, and the combination of treatment, surgeries, medications, and hospital stays cost $150,000. In this case, it would make sense to take the itemized deduction because the cost of treatment would be well over 7.5% of your AGI and is higher than the current standard deduction.

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

Remember that you can only deduct qualified medical expenses; If you rack up thousands of dollars or more in medical expenses but don’t qualify, taking the standard deduction would be the best option.

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