Health insurance premiums can be tax-deductible under some circumstances. Taxpayers who itemize may be able to use this deduction to the extent that their total medical and dental expenses, including health insurance premiums, exceed 7.5% of adjusted gross income. Self-employed people may also be able to deduct premiums for dental, health and long-term care insurance for themselves, spouses and dependents. Premiums may also qualify for special tax treatment for those who get coverage from the Health Insurance Marketplace or COBRA continuation insurance. Consider asking a financial advisor for details on whether your health insurance premiums can be deducted at tax time.
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Health insurance premiums as well as expenditures for medical and dental care, such as doctor visits and prescriptions, may be deductible if you itemize deductions on your tax returns. You also may able be able to deduct premiums for a qualified long-term care insurance policy.
However, you can only deduct the amount of these expenses that exceed 7.5% of the adjusted gross income (AGI). That is, if your adjusted gross income is $100,00 and your total combined medical expenses including health insurance come to $10,000, you would only be able to deduct $2,500. That is the amount your medical expenses of $10,000 exceed 7.5% of your AGI, or $7,500.
Another limitation can affect employees whose employers offer cafeteria plans or other benefit programs that pay all or a portion of health insurance premiums for employees using pre-tax funds. Employees who get premiums paid pre-tax in this fashion can’t deduct them unless the amount of the employer-paid premiums are included in wages, tips and other compensation and listed in Box 1 of the employee’s Form W-2.
Self-employed people can often deduct premiums paid for health, dental and long-term care insurance for themselves, their spouses and their children under age 27. This is an above-the-line deduction, which means taxpayers can use it to reduce their AGI even if they don’t itemize. This opens the deduction up to more people because most taxpayers use the standard deduction instead of itemizing.
In order to claim this deduction for the self-employed, taxpayers must not have had the option of getting healthcare insurance from a spouse’s employer-sponsored plan or another source. Also, the amount claimed as a deductible expense has to be reduced by the amount of any reimbursements received by the taxpayer or paid to medical providers.
Although health insurance premiums are only deductible some of the time, there are other ways to get a tax break on your insurance costs. For instance, if you obtain health insurance through the Health Insurance Marketplace you may be able to get a tax credit for the premiums you pay if you meet income requirements. Taxpayers who qualify for the Premium Tax Credit can even get a refund as an advance against taxes before filing their returns.
To qualify for the premium, you have to be required to get coverage through the Health Insurance Marketplace, file a joint return if you’re married and not be claimed as a dependent on someone else’s tax return. The income limitation is normally 400% above the federal poverty line, but this upper threshold was eliminated for 2021 and 2022 as part of the American Rescue Plan.
Another tax deal is available to someone who has a health savings account (HSA) and is currently paying premiums for COBRA continuation health insurance. This break lets the pay premiums with untaxed money from the HSA. Also, if you’re getting unemployment benefits you can use money from an HSA to pay for your own health insurance policy if you elect not to use COBRA coverage.
Health insurance premiums may be deductible expenses on the tax returns of self-employed people as well as other taxpayers who itemize deductions. Itemized deductions are limited to the amount, including other out-of-pocket medical expenses, exceeding 7.5% of the taxpayer’s adjusted gross income. Self-employed people don’t have to itemize to claim their deduction, but they can only take the deduction if they didn’t have the option of getting coverage from another source, such as a spouse’s employer-sponsored plan.
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Mark HenricksMark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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