For many, health insurance is one of their largest monthly expenses. Can I deduct health insurance premiums from my taxes?
If you are covered by employer-sponsored health insurance, your contributions may already be tax-free. If your contributions are made using a payroll deduction plan, they are probably in dollars before tax, so you won’t be able to claim tax deduction at the end of the year. However, you can still apply for the deduction if the total healthcare costs for the year are high enough. Self-employed persons may qualify for health insurance contributions, but only if certain criteria are met.
Deduction of medical expenses
Costs of health insurance are included in expenses eligible for the deduction of medical expenses. To calculate this deduction, specify the item that is limited to the total amount of total costs exceeding 7.5% of adjusted Gross Income (AGI) in 2019.
This rule is usually mathematically unfavorable unless you incur significant other medical costs in addition to your insurance premiums. You can include them to help you exceed the 7.5% threshold.
Deductions for self-employed people
There is an exception to the 10% rule for people running their own businesses. If you are self-employed, you can deduct all your contributions. However, if you have the right to participate in another employer’s plan and you decide not to do so, you cannot take this deduction. If you are self-employed but have a different job, this may prevent you from being deducted. Similarly, if you are eligible for insurance under your employer’s sponsored spouse plan, it may also prevent you from being deducted.
Tax deduction and pre-tax remuneration
Employees who pay for health insurance in dollars before tax through deductions from the payroll are not entitled to continue deducting the same expenses. Check your payslips if you are unsure how you pay for the insurance available from your employer. You use dollars before tax if your insurance deductions are made before your employer calculates your tax deduction.
This is not necessarily a bad thing. Paying for health insurance as a pre-tax deduction is actually more beneficial and will probably save you more money than deducting your medical expenses. Pre-tax health benefits reduce your taxable salary, and the income tax, social security tax, and Medicare tax you have to pay is a percentage of that taxable salary.
Other ways to reduce tax
If you are not entitled to deduct health insurance contributions – either because you do not meet the cost threshold or because you choose a standard tax deduction – there are other ways to reduce your overall medical costs.
You may consider choosing a high-cost deduction (HDHP) health plan as a type of insurance coverage. HDHP usually offer lower premiums than other plans. They also offer a unique feature that allows plan subscribers to open a Health Savings Account (HSA), a tax saving savings account. Money paid into an HSA account can be used to cover healthcare costs out of pocket. Contributions to the HSA are tax deductible and, in the case of eligible expenses, payments are also exempt.