Health insurance can be one of the most expensive bills a person has. In order to reduce the financial impact of insurance premiums, you may be able to claim health insurance premiums as a tax deduction. This is not possible in all situations, however, and the deduction that you claim will depend on what type of insurance you have and how much you pay for it.
Depending on what type of insurance policy you carry, how much money you make and how much the premiums cost, tax laws will vary. Even if you cannot claim a deduction on the insurance premiums themselves, it is often possible to include those premiums toward medical expenses that can be deductible, so you should be sure to check with your tax preparer to see what options are available.
No matter what your situation is, it’s a good idea to maintain good records about your medical expenses and insurance bills. By keeping track of these expenses, you can be sure to have the paperwork on hand that’s necessary to file for a deduction if one is possible; it will also help keep you organized in the event of an audit.
Group Insurance From a Cafeteria Plan
If you have health insurance through a cafeteria plan provided by your employer, the insurance premium is subtracted from your pay before taxes are assessed. Because premiums are paid by pre-tax dollars, you cannot claim the premiums as a deduction on your policy.
You can, however, claim deposits that are made into a health savings account (HSA) if these are deposited from your taxed income. In other words, if you choose to deposit a portion of your paycheck back into an HSA, that amount is tax deductible. If the HSA contribution is paid with pre-tax dollars, however, you do not qualify for a deduction.
Self-Employment and Health Insurance
Individuals who are self-employed must purchase their own health insurance. The cost of these premiums can be deducted as a business expense on your itemized tax return. Essentially, because you are both an employer and employee of your business, your healthcare counts as a business expense.
This does not count for a spouse’s insurance, however, if that spouse receives health insurance through their employer or another source. For example, if you are self-employed and receive benefits from a spouse’s group health policy through their employer, you cannot claim those premiums.
Private Health Insurance
Some people who are not self-employed may still choose to purchase a private insurance policy. This may be because their employe does not offer health insurance or if they choose a private policy as a way to enjoy better coverage or freedom. These premiums are not directly tax deductible, but they do count toward the 7.5% of your adjusted gross income (AGI) that must be paid toward medical expenses before other expenses can be deducted.
In other words, if your insurance premiums cost more than 7.5% of your annual income, the amount over this figure is tax deductible. Additionally, healthcare costs such as doctor’s visits, hospitalizations and dental work can be claimed as tax deductions once the 7.5% AGI has been surpassed.
Because of the way these deductions apply, it’s in your best interests to group as many expensive procedures into a single year as possible. This may also work to your advantage with your health insurance. If an emergency situation causes you to max out your out-of-pocket limit and deductible for insurance early in the year, consider pursuing other non-emergent medical procedures that same year rather than spacing it out. This will save you money on both tax deductions and the out-of-pocket healthcare costs.
What Types of Health Insurance are Tax Deductible?
In addition to the source of your insurance, the type of coverage you carry will have an effect on what you can deduct. Only healthcare expenses are insurance deductible. This includes medical, dental and vision insurance. Supplemental health policies for disability, income replacement and other costs are not tax deductible. You also cannot deduct premiums for life insurance policies.
Tax laws can be complex, and the best way for determining how to handle deductions for medical expenses is to discuss it with an accountant or other tax professional. This is especially necessary if you are self-employed and need to complete an itemized return. The accountant can help you determine what deductions are possible and how the tax law will work in your specific situation. This will help you maximize your returns without running the risk of audits or other trouble with the IRS.