Is Health Insurance Tax-Deductible?
Yes, health insurance can be tax deductible, but you may need to have spent enough on treatment to qualify. You can only deduct the portion of total medical expenses above 7.5% of your adjusted gross income. This article will walk you through all the different aspects of deducting health care costs so that you can get closer to maximizing your income tax returns.
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Know Your Options to Maximize Your Income Tax Returns
Having high medical expenses can be a substantial financial burden. Fortunately, depending on how much you spend throughout the year and whether or not your insurance covers medical bills, you may be eligible for deductions in your taxes.
If you meet the eligibility requirements and can provide documentation, you can take advantage of tax deductions by representing your healthcare-related expenses on your return form.
How Do Health Insurance Tax Deductions Work?
These deductions look at your Adjusted Gross Income (AGI), allowing you to deduct the total medical costs that exceed 7.5% of your AGI. Your AGI is your total taxable income minus adjustments. Gross income comes from sources such as:
- Capital Gains
- Business Income
- Retirement Distributions
“Adjustments” to gross income are deductions to your taxable income that occur from qualified expenses. Some examples of adjustments include:
- Educator Expenses
- Contributions to a Retirement Account
- Alimony Payments
- Student Loan Payments
The tax rate one is charged is calculated after adjustments are factored in. Ultimately, the more adjustments one has to their income, the less one pays in taxes. For example: Consider a person making $80,000 in gross income but has $20,000 in adjustments. This person would have an AGI of $60,000. Therefore, if this person were to deduct healthcare expenses from their taxes, they could only claim up to 7.5% of $60,000, in this case, that would be $4,500.
The insurance costs must be for medical coverage or qualifying long-term care policies. Long-term care insurance pays for your needs when you can no longer help yourself—for example, assistance with dressing, eating, and bathing. It could include meal delivery or an aide who helps you.
Whether or not health insurance is tax-deductible can also depend on who pays for your insurance costs, your employer or you.
What Is Considered a Health Expense?
In general, what you might call a health expense is usually what the IRS describes as a “medical expense” or “dental expense” where taxes are concerned. This can include costs for professional medical services, prescriptions and treatments for health conditions, hospitals, and medical devices. Mental health services provided by psychologists and psychiatrists may also be considered health expenses.
Health insurance-related costs may also be considered health or medical expenses. These costs could include insurance policy premiums, out-of-pocket expenses, and copays. As mentioned earlier, these costs must be related to medical or long-term care insurance policies. Often, consumers purchase and pay for long-term care insurance when younger for use when they’re older.
What Medical Expenses Are Tax-Deductible?
Many medical expenses are tax deductible. You may be able to deduct payments for many medical expenses, including but not limited to the following:
- Professional services: For example, a doctor’s services
- Inpatient care: Including in a hospital
- Treatments: For alcohol, nicotine, drug addiction, or weight-loss program.
- Prescription drugs: Including insulin and other medications.
- Devices: Such as wheelchairs, crutches, reading or prescription eyeglasses, contact lenses, hearing aids, false teeth, and other services and items necessary.
- Transportation: To qualifying medical care, including a taxi, train, ambulance, or car
- Insurance premiums: Payments for medical and long-term care insurance policies.
You can use the Can I Deduct My Medical and Dental Expenses? tool to figure out if any of your expenses are deductible. You must avoid claiming medical expenses already paid by your insurance company (for example, if your insurer fully reimbursed you for the cost of a set of crutches you bought, you wouldn’t claim that crutch purchase as a deductible expense). You must also reduce your medical claim amounts by the amount of insurance reimbursement sent to you by all sources.
Health Insurance Premiums That Are Tax-Deductible
You can reduce the taxes you owe by deducting health insurance premiums you’ve paid beyond the 7.5% threshold of your adjusted gross income (AGI). Specifically, health insurance premiums that entitle you to medical treatment such as:
- X-rays, surgery, hospitals
- Dental care
- Contact lens replacement
Other types of health insurance premiums you can deduct:
- Premiums paid for Medicare Part B, a type of supplemental medical insurance for those on Medicare
- Certain prepaid insurance before age 65 for medical care after age 65
- Premiums for HMO coverage and care
- Long-term care that qualifies under the IRS’s rules
Health Insurance Premiums That Aren’t Tax-Deductible
If your employer helps to pay your medical or dental insurance premiums, you probably can’t deduct those costs or any portion your employer paid. One exception is if your Form W-2, Wage, and Tax Statement include your premiums.
You can’t take the deduction if you pay your premium with a pre-tax salary reduction. That’s because if you’re already getting one advantage (credit or deduction) for the health insurance premiums, you can’t “double dip” on that advantage. As another example, you can’t deduct any expenses your insurance company paid or any health insurance premiums paid by or through the premium tax credit (more on that later).
You also can’t deduct premiums for these policies:
- Life insurance
- Earning loss coverage
- Loss of limb, life, vision, and associated issues coverage
- Guaranteed income if hospitalized or sick
- Med-pay coverage within an auto insurance policy
Other exceptions may exist, so read through the IRS documentation to ensure you understand what can and can’t be deducted.
Is COBRA Health Insurance Tax Deductible?
If you’re laid off, quit, or otherwise lose your job, you may be able to keep your healthcare policy under COBRA (Consolidated Omnibus Budget Reconciliation Act) coverage. You have 60 days to enroll and can stay on COBRA for 18-36 months. You can also get COBRA if you’re divorced or otherwise lose coverage as a dependent of the insured.
However, COBRA coverage requires you to pay all (100%) premium costs, including the employer’s share, plus a 2% administrative fee. In short, it is expensive. However, you may be able to deduct your COBRA premiums if you itemize your deductions, but only to the same limits as the standard ones above.
Speak with a tax professional to ensure you make deductions correctly and for the right amount.
Are Health Savings Accounts Tax Deductible?
A Health Savings Account (HSA) is a way of saving money for healthcare costs. First, you must enroll in a high-deductible health plan to use an HSA. Then, you set up a tax-exempt trust or custodial account with an HSA trustee (such as a bank or insurance company.)
You can contribute a maximum amount (up to $3,650 in 2022) to an individual account, and these contributions are deductible on your return, even if you don’t itemize deductions. The contributions stay in your HSA until you use them, interest and earnings are tax-free, and the account goes with you, no matter if you change employers or stop working. An HSA’s primary advantage is if you can let earnings grow for a decade or more.
When it’s time to use money from your HSA for a qualified medical expense, any money you take out isn’t taxed.
Standard vs. Itemized Deductions
Generally, health insurance can only be deducted from your taxes if you use itemized deductions on a tax return. Itemized deductions are when you list each deduction separately; this may require extensive record keeping and work. But typically, itemized deductions can add up after considering mortgage interest, charitable donations, medical expenses, and other qualifying expenses.
People itemize deductions when the amount is higher than it would be if they used a standard deduction. This standard deduction varies by year and a few other variables (including age, filing status as married, single, or head of household). Find your standard deduction amount using this too: How Much Is My Standard Deduction.
Self-Employed Health Insurance Deduction
You likely won’t have to itemize deductions to deduct health insurance premiums you pay if you are self-employed, for example. If you’re self-employed, you’ll probably be able to deduct all of your health insurance premiums, reducing the gross income you pay taxes on. The IRS defines a “self-employed” person as a sole proprietor, independent contractor, gig worker, or otherwise in business for yourself.
However, to be sure, use the Self-Employed Health Insurance Deduction Worksheet or consult a tax professional to claim this deduction properly.
Should You Take the Standard Deduction or Itemize Your Expenses?
It takes a few more steps, but you should do the math rather than assuming one type of deduction is better. First, find your standard deduction. Then, perform a quick estimate of the deductions you might be able to take using the IRS’s Itemized Deductions form. If the amounts are close, you’ll need to do more precise calculations and add up those receipts.
As an example, imagine you’re a single person. Your standard deduction for the 2022 tax year is $12,950. You total up your potential deductions using Schedule A, Form 1040. You estimate that you only have about $5,500 in deductions. So you take the standard deduction.
What If You Qualify for Federal Premium Subsidies?
The premium tax credit (PTC) is a refund or credit to help pay health insurance premiums. Generally, you qualify by meeting certain federal income requirements, which can vary by state and year. For 2021 and 2022, household income must be at least 100% of the federal poverty line for your family size, although exceptions exist, too.
The eligibility and credit amount are also influenced by the following:
- Your address and where you live
- Your family size
- Filing status (married filing separately vs. joint)
- Cost of insurance coverage
The PTC can be claimed at tax time on your forms or in advance to your insurer as an “advance payment of the premium tax credit.” In this situation, the credit is sent to your insurance company to help cover the premium cost.