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Are Health Insurance Premiums Tax Deductible?

Are Health Insurance Premiums Tax Deductible?

Posted Apr 07, 2017 by Jenifer Dorsey

 

With tax season underway and Obamacare still just a few years old, a big question many have is: Are health insurance premiums tax deductible?

Under some scenarios, they are. Under others, they are not. And there are, of course, exceptions and limitations. Read on for some basics. For more detailed information, visit IRS.gov or consult your tax professional.

Health insurance premiums that are NOT tax deductible

You cannot take a tax deduction for health insurance unless you paid for it

If your employer or the government pays your health insurance premiums, premiums are not deductible. If your employer pays part of your health insurance premiums and you pay the other part, you cannot claim a deduction for the part your employer paid.

If you bought individual or family health insurance from one of the Affordable Care Act’s state-based or federally facilitated health insurance exchanges and received an advanced premium tax credit that decreased the cost of your health insurance, it is important to note that your subsidy cannot be claimed as a deduction. 

However, the premium portion that you paid out of your own pocket might be deductible. Read the “Paid your health insurance premiums with your own after-tax money?” section below for details. 

You cannot take a deduction for health insurance you paid for with pre-tax money

The premiums you pay for job-based health insurance usually come out of your paycheck before your income taxes are calculated. Thus, your income appears smaller. This is similar to how the funds you contribute to a 401(K) retirement savings results in your income appearing smaller.

Given that, you’ve paid premiums with pre-tax money. Pre-tax means you already received a tax benefit by not paying taxes on it, so you can’t get a second benefit on the same dollars. In other words, you cannot claim them as a deductible expense.

Uncertain whether your health insurance premiums are taken out of your paycheck pre-tax or after-tax? Talk to your payroll department, or check your W-2. If your premiums are paid with pre-tax money, that money will not be included as income in Box1 (wages) on your W-2. If your premiums are paid with after-tax money, that money will be included as income on your W-2. If your premiums weren’t included as income on your W-2, you cannot take them as a deduction because they’re already tax-free.

Health insurance premiums that MAY BE tax deductible

Self-employed? Your premiums may be tax deductible

If you’re self-employed and not eligible for an employer-sponsored health plan through your spouse or domestic partner, you may be able to write off your health insurance premiums. You can’t write off more in health insurance premiums than you earned, though.

When you’re self-employed, your health insurance premiums are considered an adjustment to your income; they are listed on the first page of Form 1040 instead of being listed with your other tax deductions on Schedule A. This appears to decrease your overall income. In some ways, this adjustment-to-income approach is better than a traditional deduction. Keep in mind that: 

-  If you don’t itemize your deductions, you’ll still benefit from the income-adjustment for your health insurance premiums.

-  Many deductions are phased out at higher income levels. Decreasing your income by the amount of your annual health insurance premiums may help you stay beneath the phase-out level for other deductions.  

-  Many deductions can be taken only if they exceed a certain percentage of your income. The smaller your income appears, the easier it is to exceed that threshold and claim those deductions.

 

Paid your health insurance premiums with your own after-tax money? Those premiums could be tax deductible, with some limitations

For example, if you bought an individual or family health insurance policy on your state’s health insurance exchange, or right from an insurance company, the money you paid toward your monthly health insurance premiums can be taken as a tax deduction. You’ll list this deduction as a medical expense on Schedule A of Form 1040. However, the deduction may be limited. You'll learn more about this limitation below, in the “Limitations on premium-related tax deductions” section. 

Some Medicare premiums may be tax deductible

Part B (supplemental medical insurance), Part C (HMO or Advantage Plans), Part D (voluntary prescription drug insurance program) and Medigap supplemental premiums are deductible, but the total amounts must exceed 7.5 percent of income. 

Medicare Part A premiums are a bit trickier, and usually not deductible.  If you’re covered under social security, you get Medicare Part A automatically because you or your spouse paid payroll taxes for it while you were working. This is the case for most people, and in this case, there’s nothing you can deduct for Medicare Part A.

You may be able to deduct your Medicare Part A premiums, however, if you and your spouse:

-  Didn’t pay Medicare taxes while you were working, and

-  You’re not covered under social security, and

-  You voluntarily enrolled in Medicare Part A, and

-  You pay monthly Part A premiums.

Limitations on premium-related tax deductions

Yes, you may be able to take a write-off for health insurance. But there are limits as to how much of your premiums you can write off.

If you’re taking your health insurance as a medical-expense deduction on Schedule A, you can deduct only those medical expenses that exceed 10 percent of your adjusted gross income. Until 2017, this figure is only 7.5 percent for seniors age 65 and older.

Add up your health insurance premiums and all of your eligible unreimbursed medical expenses like your deductible, copays, and coinsurance. If all of those together are greater than 10 percent of your adjusted gross income, you can deduct the part that exceeds 10 percent of your income. 

However, if you’re self-employed and claiming the self-employed health insurance deduction on Form 1040, you don’t have to exceed the 10 percent mark. That’s because you’re writing the premiums off as an adjustment to your income rather than as a deduction. In this case, your profitability limits the amount you can claim. In other words, you can’t claim an adjustment to your income for health insurance premiums that are larger than your income. 

If you have questions or need assistance, contact your tax professional.

Don’t have health insurance?

You may be eligible for an Obamacare special enrollment period, if you’ve recently experienced a qualifying life event such as getting married or having a child. If you don’t qualify for special enrollment, you might consider a short term health plan—temporary benefits for when you are in between Obamacare coverage.

Call the number at the top of your screen to discuss your options with a certified advisor.

 

 

The post was originally publised on Feb. 18, 2015. It was last reviewed and updated on April 14, 2016.

 

References

IRS.gov. “Topic 502 – Medical and Dental Expenses.” Last reviewed or updated Jan. 4, 2016. https://www.irs.gov/taxtopics/tc502.html

IRS.gov. “Publication 554 (2015), Tax Guide for Seniors: Deductions.” 2015. https://www.irs.gov/publications/p554/ch04.html

 


 

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SHORT-TERM MEDICAL EXPENSE (STM)
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