Is Health Insurance Tax Deductible? - The Full Guide
According to the Kaiser Family Foundation, over 11 million Americans owe at least $2,000 in medical debt. And with rising costs, it makes sense to wonder, are health insurance premiums tax-deductible?
Fortunately, you should be able to deduct the cost of insurance premiums. However, you may be able to deduct other costs to lower your taxes even more. This applies to freelancers, business owners, and traditional employees.
Read on to learn about tax deductions related to health insurance.
Also read: What Qualifies As Proof Of Income?
Tax Deductible Health Insurance Premiums
In general, if you pay health insurance premiums out of pocket, they're tax-deductible. You'll report those payments to the Internal Revenue Service when paying taxes.
Depending on the plan and your situation, you may only be able to deduct parts of your health insurance costs. Anyone can deduct the cost of premiums that exceed 7.5% of their taxable income.
Be sure to speak with a professional to plan for your taxes. Then, you can deduct as much of your health care expenses as possible.
Health Insurance Marketplace
If you buy health insurance on the marketplace, you might be able to deduct the cost. This applies to self-employed people who can't get health insurance through a job.
Not only can you get tax breaks on the premium you pay, but you might qualify for premium tax credits. Eligibility depends on your income level and household size. Even if you don't qualify for any credits, you can deduct your premiums on your taxes.
However, if you qualify for insurance through a job, that eligibility goes away. Keep that in mind when selecting health coverage. That way, you can get the best deal and save money overall.
If you recently left a job, you qualify for Consolidated Omnibus Budget Reconciliation Act (COBRA). COBRA lets you keep your current health plan after leaving your job, which is nice if you like the plan's benefits.
However, you can only stay on that plan for 18 to 36 months. During that time, you won't qualify for employer-sponsored premiums, so the entire cost is on you. This can get expensive, especially if the premiums paid by your employer covered most of the cost.
The health insurance premium will be tax-deductible for you, though. That can help lower your tax burden at the end of the year. And it may make the cost of the plan less overwhelming
Also read: Are Moving Expenses Tax Deductible?
Medicare Parts B and D
Medicare tax covers Medicare Part A, which covers hospital insurance. However, a lot of people who qualify will see coverage for other medical costs.
If you want medical insurance, you may be able to deduct your insurance premiums for Parts B and D. Part B offers standard insurance, while Part D covers prescription drugs. Those premiums may help lower your medical bills significantly when you get on Medicare.
You should consider the different parts of Medicare when retirement planning. Then, you can figure out which parts you'll get for free and which you'll pay for. And you can figure out how much you will be able to deduct from your taxes.
Other Health Insurance Premiums
Unfortunately, not all health insurance premiums are tax-deductible. Whether you're self-employed or have a traditional job, you should consider your health insurance policy. Then, you can determine if you will need to cover the cost with after-tax dollars.
Some of the best health coverage doesn't qualify for a tax break. That doesn't mean you shouldn't enroll in that sort of plan. However, you will need to account for the cost when calculating the taxes you'll owe.
Consider the types of plans where you can't deduct the overall cost of medical care.
Pre Tax Dollars
If you receive health insurance through an employer, you will pay premiums with pre-tax dollars through a payroll deduction. Your employer will take care of paying the premium for you, so you don't have to worry about deducting the money on your tax return.
Now, even if you're self-employed, you may still not be able to deduct premiums. For example, consider if you receive coverage through a spouse's employer. Their company will handle the insurance payments for your spouse's plan.
The same applies if you still qualify for coverage on a parent's insurance plan. Even if you work for yourself, you should consider your plan to determine if you can deduct health insurance premiums.
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It may seem obvious, but you can't deduct the employer portion of premium payments. If you have employer-sponsored health insurance, you won't have to pay taxes on the money you spend on your part of the coverage.
Now, if you have a business with employees, you can deduct the employer portion. However, most people with employer-sponsored health insurance can't deduct the cost.
Luckily, you won't see those costs show up on your income tax. Your employer paid everything for you, so all you have to do is keep your job to maintain that same plan.
Similar to the employer portion of employer-sponsored coverage, marketplace subsidies aren't eligible for a deduction. If you qualify for a premium tax credit based on your adjusted gross income, you can only deduct what you pay out of pocket.
Self-employed individuals can take advantage of the credit, especially if they don't make a lot. So consider how much you spend on health insurance to figure out what you can write off on your taxes.
Now, you can deduct expenses outside of the subsidies. And you may be able to deduct other medical bills that come up throughout the year. Keep that in mind when choosing a marketplace plan.
Tax Deductible Medical Expenses
Of course, you may be able to deduct premiums from your income. However, you might also be able to write off other medical expenses.
Take a look at your total medical expenses. Subtract the total amount you've received in reimbursements. Then, you can determine if the amount left qualifies for tax benefits.
Some expenses are deductible while others aren't. If you aren't sure if you can deduct something, talk to an accountant. However, here are some expenses you may be able to write off.
Also read: Tax strategies for high-income earners
If you receive inpatient hospital care, you might be able to deduct the cost on your taxes. Inpatient care is any type of care that requires you to stay overnight. Maybe you had a complex surgery, or doctors wanted to monitor you for a while.
You might also qualify for a deduction if you have to stay at a rehab facility. The same is true in some cases if you need to stay at a nursing facility. Your stay will only be tax-deductible if your stay is a medical expense rather than your choice to live there.
Be sure to ask your medical provider about eligible expenses for tax deductions. Then, you can make sure you don't do anything wrong when filling out your taxes. You can also ask an accountant or your insurance company about the charges.
Another one of the medical expense deductions you can make is on prescription drugs. If you take a lot of medications, the costs can add up. You may pay more for your medicine than other medical expenses combined.
Insulin also falls into this category, so you can save money on your taxes. Now, this doesn't mean you should go looking for more prescriptions to take. Adding more medications can add risk to your current regimen.
However, deducting prescription drugs and insulin may help you reduce your expenses significantly. This is true whether you're a self-employed person or not.
Glasses, Contacts, Hearing Aids, and More
Another category of qualified medical expenses includes glasses and contacts. Hearing aids fall into this category as well as wheelchairs and crutches. The same is true of fake teeth and reading glasses.
Anything that helps you interact with the world and that is a necessity can fall into this category. If you have to pay for these medical costs, you may be able to deduct them. That can help lower your adjusted gross income (AGI) and thus lower your taxes.
Make sure to track the tax year in which you buy any of these items. Then, you can enjoy the benefits of these costs on your taxes.
Another thing to consider when looking at medical expenses is if you have a service animal. The animal may qualify for a medical expense deduction. However, only the portion that you pay can qualify for a tax break.
If part of the cost comes from a charity or the service animal training facility, you can't write that off. Keep track of the money you do spend on the dog, from food to vet visits to training. Then, tax planning won't be as stressful at the end of the year.
While service animals aren't always necessary, they count as part of your medical expenses. If you choose to have a service dog, you will incur a lot of extra costs. Fortunately, you can reduce your tax liability.
Also read: Is College Tuition Tax Deductible?
Dental Care and Treatment
Dental insurance may be separate from health insurance, but you can still deduct dental expenses. Going to the dentist is part of your overall medical expenses, so you will want to write off the cost to lower your tax bill.
You'll need to fill out the proper IRS form and include your dental costs and other expenses. This applies whether you're self-employed or have a traditional job. Now, you won't be able to deduct costs that you don't pay.
For example, if your dental insurance covers cleanings, you can't deduct the cost of cleanings. However, you may be able to deduct anything that your insurance doesn't cover.
When looking to deduct medical expenses, consider if you pay for acupuncture. You can deduct some of those treatments, especially if your health insurance plan doesn't cover them.
If you're looking for a new treatment option, acupuncture may be worth a try. Then, anyone, from self-employed people to employees, can lower their taxes.
If your doctor diagnoses you with a disease such as obesity, they may recommend a weight-loss program. When you start the program, it may count as a tax-deductible medical expense.
Unfortunately, you can't just start a weight loss program and deduct the cost on your taxes. If your doctor doesn't give you a diagnosis that requires a weight-loss program, it may not qualify as a medical expense.
You may also consider if your health plan helps cover weight-loss programs. If so, you'll only be able to deduct the amount that you pay to participate in the program.
Another type of program that may qualify for a tax deduction is one that helps you stop smoking or get over your nicotine addiction. You should keep track of the money you spend on such a program.
At the end of the year, you can write off those costs on your taxes. Then, you can save money and get healthier. You can then lower your health insurance premiums, especially if you buy a marketplace plan since smokers tend to pay more.
You may also be able to deduct transportation costs on your tax return. If you have to pay to travel to an appointment, for example, those costs can qualify for a tax deduction. This can apply to costs such as taxi rides or gas you put in your car to get to the doctor.
When you drive yourself, you can also deduct toll fees and parking fees. Another deduction you can make is the cost of an ambulance ride. Anything that helps you get the health care you need can go on your tax return.
If you travel farther by plane or train to a conference for your disease, you may also be able to deduct that from your taxable income. The same is true if you travel to a conference for a disease that your spouse or child has.
Of course, you should consult an accountant and your doctor about qualified transportation costs before filing your taxes.
For Self Employed Individuals
If you're self-employed, you have more things to think about regarding health care. In some cases, you can deduct more than you'd be able to as a traditional employee. However, health insurance deductions can be more complex, especially if you have employees.
You may already have a more complicated income tax return. If you want to make tax preparation easier, you should consider what may affect your ability to deduct premiums and other expenses.
Here are some things to keep in mind when planning for tax season when you work for yourself.
You can only deduct the cost of self-employed health insurance if you don't qualify for another plan. This applies whether you qualify for a premium tax credit or not.
For example, perhaps you get married in June, and your spouse has insurance through an employer. Your health insurance premiums would be tax deductible from January through May. Once you qualify for medical care coverage on a pre-tax basis, that goes away.
Your situation may also change if you have coverage at the beginning of the year. If your spouse leaves their job in June, you'd start to be able to write off your premiums. The same is true if you age out of an employer plan through your parents.
Earned Income Requirement
Another thing that can limit your health insurance deduction is the earned income in your business. If you pay more in insurance premiums than what you make, you can't deduct all of the money you spend on premiums.
For example, if you spent $4,000 on premiums but only made $3,000, you can't deduct the remaining $1,000. Be sure to look at your adjusted gross income as well as what you spent on your health plan.
Then, you can determine how much of your premiums will be tax-deductible. If you can't deduct everything, you will need to say so on your tax return. Be honest so that you can avoid penalties in case of an Internal Revenue Service audit.
The business structure you have may also affect how you will handle health insurance deductions. Sole proprietors won't have to worry about this. You and your business are legally the same, so you'll pay and deduct health care costs on your personal tax return.
If you have an LLC or partnership, consider if you or your business pays the insurance premiums. You may pay for your insurance individually, so you can deduct the costs on your individual return.
When the business pays, you'll report them on your business tax return. That means your business will get the tax breaks, not your individual taxes.
Consider how much you expect to make each year as well as if you have employees on your health insurance plan. Then, you can determine if it makes more sense for you or your business to cover the premiums.
If you have employees and pay for their insurance, you can deduct the portion of the premiums that you cover. The same is true if you make retirement plan contributions, for example.
Both of those expenses will be on a pre-tax basis. Of course, you'll also need to deduct the employee portion from their paychecks. Your employees may ask you, "are health insurance premiums tax-deductible for them?"
Since you took money out of their pay for them, they don't get to deduct the costs on their individual tax returns. However, they don't have to pay taxes on those expenses in the first place.
Standard Deduction or Itemized Deduction
Whether you have an employer or work for yourself, you should compare the standard deduction and itemized deduction. The standard deduction is good if you don't have a lot of things to deduct because it's a flat rate that applies to all of your income.
However, if you have a lot of deductions, itemizing them may be the better option. Then, you can make sure to deduct medical expenses and other qualifying costs in full.
Consider everything on your return that is tax-deductible, health-related or not. Look at your pre-tax and post-tax income and compare that to the standard deduction. Then, you can determine if you'll save more on your taxes with one deduction or the other.
Other Ways to Save Money on Health Insurance
If you can't deduct all of your medical expenses, you have options. When looking for health insurance plans, consider high deductible health plans (HDHPs). These plans are eligible for a health savings account (HSA).
You can contribute your pre-tax dollars to your HSA. Throughout the year, you'll be able to use that money on qualifying medical care, from a doctor's visit to a prescription. Even if you don't use the money for medical costs, you can still save on your taxes.
Another option is a flexible spending account (FSA). This is a similar account that lets you save money before taxes to use towards health care costs. However, you have to use the money by the end of the year, or you'll lose that money forever. Some plans let you use the money through March 15 of the following year.
If you choose an HSA, the money rolls over each year. That can help you save a lot of money in case you have a major medical expense. However, not every plan qualifies for an HSA, so consider that when selecting coverage.
Can You Deduct Health Insurance Premiums and Other Costs?
You can deduct certain medical costs on your tax return. Health insurance premiums are some of the biggest costs for many people. Luckily, you don't have to pay taxes on them, whether you have job-based coverage or buy your own.
Certain other medical costs qualify for similar tax benefits. Transportation, prescriptions, and inpatient stays are some examples. If you want to deduct those costs, keep good records and talk to an accountant.
Then, you can make sure to file your taxes correctly and avoid penalties.
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