When can I take the cost of my health insurance off my taxes?
One of the most important types of insurance you should have is health insurance. But whether you get health insurance through your employer, the marketplace set up by the Affordable Care Act (ACA), or a private company, the premiums can be expensive.
You might be able to deduct your health insurance premiums and other health care costs from your taxable income. This can lower the amount of money you owe the IRS in April.
Is tax money taken off for health insurance?
Health insurance costs may be tax-deductible, but it depends on how much you spent on medical care last year and if you’re self-employed.
Claire Hunsaker, founder of AskFlossie, a financial network for women, explains that self-employment guidelines are different.
Self-employed people who pay their own health insurance premiums can deduct them from their taxable income.
“Self-employed health insurance premiums are deductible as a “above the line” deduction on Form 1040,” says Hunsaker. This means that you can deduct the premium even if you don’t itemize deductions on Schedule A.
If you get a W-2, the rules are much stricter. You can only deduct the part of your health insurance premium that you pay out of pocket if you itemize your deductions on your tax return. Even then, “the premiums can only be deducted to the extent that they and other medical costs exceed 7.5% of your adjusted gross income (AGI),” says Hunsaker.
Here’s how tax breaks for different kinds of health insurance work.
Health insurance provided by an employer
Most consumers don’t pay enough for their employer’s health insurance to be tax deductible.
Your employer pays most group health insurance rates.
Your paycheck is deducted without taxes.
Health insurance premiums purchased through the ACA marketplace are deductible.
All of the premiums paid by people who have health insurance through the Affordable Care Act are tax deductible, and they can be reported on Form 1040.
ACA marketplace plans
When you buy an ACA marketplace plan through a state exchange or the federal exchange at Healthcare.gov, you can get a tax break. This could help people who work for themselves and can’t get health insurance through their employer or their spouse.
But this isn’t a deduction for people who work for themselves. It’s a change to your income that is taxed.
You pay ACA marketplace premiums with pre-tax money.
So, Form 1040 allows ACA health insurance holders to deduct the full cost of their annual premium from their taxable income.
There are some exceptions:
- If your spouse’s employer-sponsored group health insurance plan doesn’t include comprehensive coverage, you can’t deduct your ACA health insurance premiums from your taxable income.
- If you qualify for ACA premium tax credits found in the marketplace, it will change how much money you can deduct on your taxes. If you get a subsidy that pays for 70% of your health insurance premium, you can only deduct the 30% you pay on your taxes.
COBRA insurance plans
When you pay COBRA insurance payments without employer assistance, you can deduct them as medical expenses on your taxes.
You can deduct COBRA premiums and other medical costs if they exceed 7.5% of your adjusted gross income (AGI) and you itemize When tax deduction health insurance can be applied
Unlike insurance premiums purchased through the ACA marketplace, COBRA payments are not tax deductible
Short-term insurance for health care
Short-term health insurance premiums are usually medical bills.
If you itemize and your medical expenses exceed 7.5% of your AGI, you can deduct pre-tax short-term health insurance premiums
What medical costs can be written off?
Many people don’t know that you can deduct some costs from your federal taxes. Besides your health insurance premiums, the following may also be deductible medical costs:
- Costs of long-term care insurance
- Dental insurance premiums
- Vision insurance premiums
- Preventive medical care
- Treatment certain illnesses
- Things a person with a medical disability needs
- Services for mental health
- Costs of getting to and staying at a hotel for medical appointments
It’s important to remember that you can only deduct the cost of qualifying medical expenses if the total amount you paid is more than 7.5% of your AGI and you choose to itemize your deductions. You can’t deduct what your health plan or employer paid for.
Hunsaker says that this tax break can be very helpful for people who have disabilities, long-term illnesses, or major medical events. But it is hard to get the deduction if you only go to the doctor a few times a year for basic and preventive care.
This is why: The median AGI of a U.S. household is $67,521 according to the 2020 U.S. Census, and 7.5% of that is $5,064.
“That means you can only deduct expenses after the first $5,064, and it makes sense to itemize deductions if you meet the criteria,” says Hunsaker.
Medical costs that can’t be deducted from your taxes
To get the deduction, the money spent must have been on treatments or equipment that were medically necessary. So, you can’t deduct things like:
- Non-prescription drug
- Surgery for looks
- Nicotine patches and gum that don’t need a prescription
- Programs to improve health in general
Is there a tax break for extra health insurance?
Supplemental health insurance premiums, like those for hospital indemnity insurance and critical illness insurance, are usually tax deductible, but only if they are a qualified medical expense.
You can deduct the cost if your total medical expenses and premiums for extra health insurance are more than 7.5% of your adjusted gross income and you itemize your deductions.
Is there a tax break for COBRA health insurance?
On your federal income taxes, you can deduct the cost of COBRA health insurance.
But, like most types of health insurance, COBRA premiums are considered a medical expense and can only be deducted if you itemize your deductions and your medical expenses are more than 7.5% of your adjusted gross income for the tax year. When tax deduction health insurance can be applied
Do HSAs have a place for tax withholding
Health savings accounts (HSAs) that go with high-deductible health plans are tax-deductible, even if you take the standard deduction.
“If you have a high-deductible health plan, you may be able to keep your HSA payments out of your gross income,” adds Adams
For 2022, the most an individual can put into an HSA is $3,650 and a family can put in $7,300. As a “catch-up” contribution, people over age 55 can put in an extra $1,000 per year.
In 2023, the most you can put into an HSA as an individual will be $3,850 and as a family it will be $7,750.
When is it better to take a standard deduction instead of a deduction based on items?
If you had significant uninsured medical or dental expenses during the tax year, itemizing your deductions could be beneficial.
To qualify for tax breaks, however, you need to spend more than 7.5% of your adjusted gross income (AGI) and your standard deduction (depending on your filing status). .
The standard deduction for a single taxpayer in 2022 is $12,950, and it’s $25,900 for a married couple filing jointly.
Let’s look at a specific case. Let’s say that your adjusted gross income for the tax year is $90,000. You received a cancer diagnosis and spent $150,000 on therapy, surgeries, medication, and hospitalization.. In this case, it would make sense to take the itemized deduction because the cost of treatment would be more than 7.5% of your AGI and more than the current standard deduction.
But suppose you had the same adjusted gross income for the year but just $5,000 in out-of-pocket medical costs.
Considering that your medical costs don’t exceed 7.5% of your adjusted gross income, the standard deduction is the more efficient option to reduce your taxable income.
Remember that you can only deduct medical expenses that meet certain requirements. Use the standard deduction even if your medical bills total thousands of dollars but don’t fit the criteria. When tax deduction health insurance can be applied
