Several People consider their health insurance to be one of their biggest monthly expenses, which makes them curious about what medical costs are deductable from their income. Some consumers are looking to cut their expenditures by receiving tax discounts on their monthly health insurance payments as healthcare costs grow.
Your premiums can already be tax-free if you are covered by a health insurance plan provided by your employer. You would not be permitted to claim a year-end tax deduction if your premiums were paid through a payroll deduction plan because they were probably paid with pre-tax funds.
Nonetheless, if your overall yearly healthcare expenses are high enough, you might still be eligible to claim a deduction. Self-employed people might be eligible to deduct their health insurance premiums, but only if they fulfill certain requirements. The subject of tax-deductible medical expenses, including the criteria for eligibility, will be covered in this article.
Key Factors
- With the rising expense of healthcare in the US, health insurance premiums—the amount paid up front to maintain an insurance policy—have been rising significantly.
- When President Barack Obama signed the Affordable Care Act into law in 2010, it gave some families access to premium tax credits for their health insurance plans.
- You wouldn’t be able to claim a year-end tax deduction if you were enrolled in an employer-sponsored plan and paid your premiums through a payroll deduction because they were probably made using pre-tax money.
- If your healthcare expenses total more than 7.5% of your adjusted gross income, you may be able to deduct your health insurance premiums as well as other related expenses (AGI).
- If a self-employed person meets the requirements, they could be allowed to deduct their health insurance premiums even if their expenses fall below the 7.5% cap.
Health Insurance Premiums: Overview
In line with rising healthcare expenses in the US, health insurance premiums—the amount paid upfront to maintain an insurance policy—have been rising gradually. Without taking into account other payments that consumers must make, including as deductibles, co-pays, and additional out-of-pocket expenses, premiums can be thought of as the “maintenance charge” for a healthcare coverage.
When President Barack Obama signed the Affordable Care Act into law in 2010, it gave some families access to premium tax credits on their health insurance plans, easing some of the responsibilities associated with rapidly rising health insurance premiums.
A non-profit organization in the United States that focuses on healthcare issues, the Kaiser Family Foundation, found that almost half of Americans have health insurance through an employer-based plan.
You are almost certainly using pre-tax funds to pay your portion of the insurance premium if your medical expenses are deducted through a payroll deduction plan. You would basically be deducting your premiums twice if you did so at the end of the year.
Qualified Unreimbursed Healthcare Expenses Deductions
Nevertheless, if you buy health insurance on your own using after-tax money, you might be able to deduct some of your premiums. You can deduct any eligible medical expenditures you spent for yourself, your spouse, or your dependents for the tax years 2022 and 2023, but only if they total more than 7.5% of your adjusted gross income (AGI).
Your AGI is a change to your gross income. It includes all of your sources of income, such as wages, dividends, spousal support, capital gains, interest income, royalties, rental income, and retirement distributions. However, it does not include any of the allowable deductions from your income, such as retirement plan contributions, student loan interest payments, losses from the sale or exchange of property, or early withdrawal fees assessed by financial institutions.
The cost of a health insurance policy’s premiums as well as any out-of-pocket payments for items like medical visits, operations, dental work, vision treatment, and mental healthcare are expenses that are eligible for this deduction. But, you can only deduct expenses that total more than 7.5% of your AGI.
How to Calculate Your Healthcare Deductions?
Let’s say, for example, that your annual adjusted gross income was $50,000. Any eligible expenses in excess of $3,750, or seven and a half percent of that sum, are deducted. If you had $6,000 in total medical costs, including premiums, you may subtract $2,250 from your taxable income. Make sure you don’t factor in any reimbursed costs, such as premium tax credits, while performing your computation. If a person acquired their insurance through the Health Insurance Marketplace, sometimes referred to as “The Marketplace,” they may be eligible for premium tax credits.
Individuals, families, and small companies can obtain health insurance through the Marketplace. In order to attain the highest level of compliance with the need that every American carry some sort of health insurance, it was established as a result of the Affordable Care Act in 2010. You might be eligible for income-based government subsidies if you buy health insurance through the exchange, which assist cover the cost of premiums charged on the exchange. According to the HealthCare.gov website, if your estimated income is between 100% and 400% of the federal poverty line for your household size, you are eligible for a premium tax credit. You may still be eligible for premium tax credits that cut your monthly premium for a Marketplace health insurance plan through 2025 if your income is over 400% FPL.
It would be helpful if you also excluded any expenses that were paid for by your employer or insurance provider. You must itemize your deductions in order to deduct medical costs rather than using the standard deduction. Consequently, before making this choice, it is in your best interest to make sure that the total of your itemized deductions exceeds the standard deduction amount.
The standard deduction increases to $13,850 for individuals and $27,700 for married couples filing joint returns for the tax year 2023, from $12,950 for those filing individual returns and $25,900 for those doing so jointly in 2022.
Self-Employed Medical Expense Deductions
The 7.5% rule has an exemption for people who own their own enterprises. You are entitled to deduct all premium payments from your adjusted gross income, regardless of whether you itemize deductions, as one of the many tax benefits and deductions available to self-employed people. You might, however, be ineligible for this reduction if you are:
- Eligible to participate in the plan of another employer and elect not to
- Self-employed, but you have another job that provides a health coverage
- Being qualified for coverage under a spouse’s employer-sponsored plan
Also, self-employed people are subject to restrictions based on the volume of their business revenue. A self-employed person is only permitted to deduct the amount of company revenue they actually receive in any given year. If an individual owns more than one business, only one of them may be designated as the health insurance plan sponsor; the total income from all businesses cannot be added together to determine the maximum deduction. 125 Self-employed individuals may find it advantageous to designate their most lucrative business as the plan sponsor in order to maximize the amount of tax relief they may receive.
Self-employed people can deduct certain expenses from their income taxes as a write-off; these expenses are not deducted when they file on behalf of any of their business operations. For instance, a lone proprietor would put the deduction amount on their Form 1040 rather than on their Schedule C form, also known as “Profit or Loss from Business,” in the case of a sole owner.
Alternatives To Reduce Your Tax Bill
There are other ways to lower your overall medical costs if you are unable to deduct your health insurance premiums due to either not meeting the cost requirement or choosing to use the standard deduction when filing your taxes.
You could choose to have insurance coverage through a high-deductible health plan (HDHP). In comparison to other plans, HDHPs often have lower premiums. Additionally, they provide the special ability for plan members to create a Health Savings Account (HSA), a tax-advantaged savings account. An HSA account’s contributions can be used to cover out-of-pocket medical bills. Your HSA contributions are tax deductible, and your withdrawals are tax-free when utilized for qualified expenses.
You can shift more of your overall medical expenses to a savings account with additional tax advantages by choosing an HDHP. The more money you can save by using an HDHP, the higher your tax bracket must be. The IRS defines an HDHP as an individual insurance coverage with a deductible of at least $1,400 or a family policy with a deductible of at least $2,800 for the tax years 2021 and 2022. 15 A high-deductible health plan is one that has yearly out-of-pocket maximums of no more than $7,500 for self-only coverage and $15,000 for family coverage, as well as annual deductibles of no less than $1,500 for self-only coverage or $3,000 for family coverage.
HSA and COBRA Funds
You might occasionally be able to use HSA funds to pay health insurance premiums as well. This would imply that you would also pay your premiums before taxes. This might be conceivable, for instance, if you temporarily continue to be covered by your former employer’s insurance plan.
After you leave your job or if you become ineligible for insurance coverage through your employer-sponsored plan because you’re working fewer hours, you may be able to maintain group coverage for up to 18 or 36 months (depending on the applicable scenarios) thanks to a provision created by the Consolidated Omnibus Budget Reconciliation Act (COBRA).
When you enroll in COBRA coverage, you normally take on responsibility for paying the full cost of your premiums, unlike when you have health insurance through your employer, which will typically contribute a portion of the cost. If you had an HDHP with an HSA through your workplace before choosing COBRA coverage, you often have the choice of taking your HSA account with you and continuing to contribute to it. Hence, even if your premiums can be greater in this situation, you still get the benefit of paying them with pre-tax money.
Providing you are enrolled in an HDHP and have an HSA account, you may pay your premiums with pre-tax money even if you are receiving unemployment benefits.
HDHP Limitations
While an HDHP may have certain tax advantages, not everyone will find them to be a suitable healthcare option. Choose a plan with more extensive coverage if you have a pre-existing medical condition or anticipate spending a lot on healthcare in the next year.
Due of the characteristics of an HDHP, they are normally only suggested for those who don’t anticipate needing healthcare coverage other than in the event of a major medical emergency. During the open enrollment period, you should carefully consider your options to determine which plan best suits your needs.
What Medical Expenses Are Tax-Deductible?
Inpatient hospital care, acupuncture treatments, participation in weight-loss programs, payments to doctors, dentists, and surgeons, among other expenses, are all tax-deductible medical expenses. On its website, the Internal Revenue Service provides a list of instances of deductible medical expenses.
What Medical Costs Are Not Tax-Deductible?
Funeral and burial costs, non-prescription medications, toothpaste, toiletries, cosmetics, and other costs are examples of medical expenses that are not tax deductible.
Health Insurance Premiums: Are They Tax-Deductible?
You’re allowed to deduct any eligible medical expenditures you spent for yourself, your spouse, or your dependents for the tax years 2022 and 2023, but only if they total more than 7.5% of your adjusted gross income (AGI). Also, even if their premiums don’t go over 7.5% of their AGI, self-employed folks can still deduct them.
Qualified Medical Expense: What Is It?
Doctor visits, lab tests, and hospital stays are examples of qualified medical expenses that can often be deducted on an annual income tax return as medical expenses.
Can You Claim Medical Expenses on Your Tax Return?
It depends. Only eligible medical expenses exceeding 7.5% of your adjusted gross income may be claimed. Schedule A calculates the maximum deduction that you may make (Form 1040).
Finals Thoughts
Your premiums are probably already tax-advantaged if you are enrolled in an employee-sponsored plan. You could, however, be able to claim a tax deduction when you buy your insurance plan in some specific cases.
For instance, if your overall healthcare expenses surpass 7.5% of your adjusted gross income (AGI) or if you’re self-employed, you can write off the amount you paid for your health insurance premiums. If the latter is true, you might be able to deduct the entire amount you spent on premiums (as long as the amount doesn’t exceed your business income).