Finding out what deductions they may be eligible for tends to confuse people during tax season. When used appropriately, deductions can help reduce the overall tax liability. If you’ve been meaning to find out are health insurance premiums tax deductible, the short answer is “Yes, they are!”
How you can go about claiming this deduction depends on how you obtain health insurance. Here’s everything you need to know about deducting health insurance premiums.
Understanding How Health Insurance Premiums Can Be Tax Deductible
There are three basic criteria based on which you can figure out if you can take a tax deduction for insurance premiums:
- You don’t take the standard deduction and itemize your deductions instead
- The insurance premiums are paid by you directly and not by your employer
- Your medical expenses were more than 7.5% of your total income for the year
According to the IRS, deductible medical expenses can include but aren’t limited to payments of fees to doctors, surgeons, dentists, and other medical practitioners. Payments for insulin, contact lenses, prescription eyeglasses, wheelchairs, etc. are also deductible. The IRS allows you to deduct these expenses for yourself, your spouse, and your dependents.
Employer-Provided Health Insurance Premiums
You can’t deduct a health insurance premium paid by your employer, whether partly or in full. Similarly, any premiums that come out of your paycheck pretax can’t be deducted. This limitation is also applicable to contributions made to Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs).
Since the advantage of tax savings is already realized by your employee contributions, you can’t deduct those premium payments again on your tax return. That would amount to doubling the tax deduction benefit which is not allowed.
Self-Employed Individuals and Health Insurance Premiums
People who are self-employed and end the year with a net profit can deduct the medical insurance premiums they pay themselves, their spouse, and their dependents. It’s not allowed to deduct more than the business profit under this benefit and the profit can’t be a tax loss.
This benefit isn’t reliant on itemizing deductions and it reduces the AGI (adjusted gross income). It also eliminates qualification for any employer-provided insurance from another job or spouse. As long as these conditions are met, self-employed individuals can deduct their health insurance premiums.
Health Savings Accounts (HSAs) and Tax Deductibility
Contributions to Health Savings Accounts (HSAs) may be tax deductible depending on how the contributions are made. If the HSA is offered by the employer, they will automatically deduct the money from the paycheck to contribute tax-free dollars to the account. Therefore, a tax deduction can’t be claimed for these contributions.
For any other type of HSA where the contributions aren’t being made through a payroll deduction, and the funds are deposited directly by the account holder with the HSA provider, a tax benefit can be claimed for the premiums paid. The IRS has set annual contribution limits for HSAs at $3,850 for an individual plan and $7,750 for a family plan in 2023.
Itemized Deductions vs. Standard Deductions
When filing taxes you can choose to either itemize deductions and provide details about every single deduction you claim eligibility for, such as health insurance premiums, student loan interest, etc., or take the standard deduction, which is a predetermined dollar amount based on your family status.
You’re only allowed to deduct health insurance costs from your income if you itemize deductions. Itemize the medical and dental care expenses paid for yourself, your spouse, and your dependents on Schedule A (Form 1040). You can only deduct the amount of total medical expenses that exceed 7.5% of your adjusted gross income.
How Much Is the Standard Health Insurance Premium Deduction?
Standard deductions are simpler to claim since there’s no need to itemize every single deduction claimed, which can be a lot of work. The IRS provides a specific dollar amount for every tax year that you can subtract from your income to reduce the amount of income you get taxed on. The amount of your standard deduction will depend on the size of your family.
The 2023 standard deduction for Single; Married Filing Separately is $13,850, Married Filing Jointly; Qualifying Widow(er) is $27,700, and Head of Household is $20,800. It’s typically recommended that the decision to choose either the itemized or standard deduction should be based on whichever option reduces the adjusted gross income (AGI) the most.
Can I Deduct Premiums for Long-Term Care Insurance?
Yes, you can deduct premiums for qualified long-term care insurance if they are more than 7.5% of your adjusted gross income. However, the IRS limits the total amount of annual premiums that you can deduct based on your age. The 2023 deduction limits for ages 40 and under, 41 – 50, 51 – 60, 61 – 70, and 71 and older are $480, $890, $1,790, $4770, and $5,960 respectively.
Calculate the deduction by adding your long-term care expenses to the amount of insurance premiums you can deduct based on your age. If these expenses exceed 7.5% of your AGI, you can claim this benefit provided you itemize deductions.
Can I Claim the Health Insurance Premium Deduction if I am Unemployed?
Yes, you can claim the premium deduction even if you’re unemployed. Those who are unemployed may be able to get coverage with a plan available through the health insurance marketplace. The eligibility will be determined by your household size and income, not employment status.
There may also be eligibility for tax credits and savings on deductibles on a marketplace insurance plan. COBRA insurance premiums are also tax deductible since you’ll be paying for them yourself on taxed income. This health plan enables you to retain your employer-sponsored insurance temporarily after you leave the job.
Maximize Your Tax Benefits with Diligent Planning
Diligent tax planning is vital to maximizing tax benefits. Once you understand how to calculate and claim all the deductibles you’re eligible for, it helps reduce the gross income you’re taxed on, thereby reducing your overall tax liability. It’s best to always consult with your tax professional to ensure that everything is above board.
If you’re self-employed, you’ll also require assistance with business taxes. With the professionals behind doola’s LLC formation service at your side, your business tax filings become stress-free.
Is there a specific form I need to use to claim the health insurance premium deduction?
You’ll need to itemize deductions on Schedule A, IRS Form 1040, Itemized Deductions, in order to claim the health insurance premium deduction. This can only be done if you itemize deductions.
Can I claim the health insurance premium deduction if I have a Flexible Spending Account (FSA)?
If you’ve used your healthcare Flexible Spending Account to pay for eligible expenses, you can’t deduct those expenses from your federal income tax return.
Are health insurance premiums deductible for retirees?
Health insurance premiums are deductible for retirees, provided that they itemize deductions. They can also claim deductions for long-term care insurance premiums with the amount varying based on the age bracket they’re in.
Can I deduct health insurance premiums if I’m covered by Medicaid or other government assistance programs?
Subject to certain conditions, such as having a household income that falls within a certain range, you can deduct health insurance premiums paid for Medicaid or other government assistance programs, as long as you itemize deductions.
Can I deduct health insurance premiums if I’m covered by my spouse’s employer-sponsored plan?
Health insurance premiums paid on a pre-tax basis by employers are typically not deductible, so the limitation will similarly apply even if you’re covered by your spouse’s employer-sponsored plan.