Are My Health Insurance Premiums Tax-Deductible?

When tax time rolls around, you may be wondering if your health insurance premiums are tax-deductible. It depends on who you are and who you work for.

Self-employed

If you are self-employed, the answer often is yes—the premiums you pay to cover yourself and your dependents are probably tax-deductible, as long as you're obtaining your own health insurance.

This is true regardless of whether you get your insurance through the exchange, or in the individual market outside the exchange. Premium subsidies (premium tax credits) are available in the exchange, but not outside the exchange. Either way, self-employed individuals can only deduct the amount they actually pay in premiums. There's no "double-dipping" allowed, so if you receive a premium subsidy in the exchange to cover a portion of your premium, you can only deduct your after-subsidy premium on your tax return.

It's important to understand that the amount of premium subsidy you receive is related to your modified adjusted gross income (an ACA-specific calculation, which differs from normal modified adjusted gross income), but the premiums you pay for health insurance as a self-employed person are a factor in determining your modified adjusted gross income. This ends up being a circular problem: Your premium subsidy depends on your adjusted income, but your adjusted income depends on your premium subsidy.

But the IRS has addressed this issue, and your tax adviser or tax software can help you sort it out.

But even if you're self-employed, if you, your spouse, or your dependents are covered by an employer's group health insurance plan (either your own, from a separate job, or your spouse's or parent's plan), the premiums you pay for that coverage are probably not something you can deduct on your tax return.

That's because they're most likely already being paid with pre-tax dollars since employer-sponsored health insurance is tax-deductible for both employers and employees.

Health Savings Accounts

If you have an HSA-qualified high deductible health plan (HDHP), you may have a health savings account (HSA). Your HSA may be established through your employer, or it may be something that you set up on your own, as you can have an HDHP offered by an employer or purchased in the individual market.

The contribution you make to your HSA is 100 percent tax deductible up to a limit of $6,900 for family coverage and $3,450 for individual coverage in 2018. Contributions to your HSA can be made by you or by your employer, but only the portion you contribute yourself is tax deductible. If you fund your HSA through payroll deduction, the contributions will be made on a pre-tax basis, and that will be reflected in the W-2 you receive (ie, you won't have to deduct them on your tax return, as they will have already been deducted from your taxable income). But if you fund your own HSA, you'll keep track of the contributions you make during the year and deduct the total on your tax return.

Premiums as part of overall medical expenses

Even if you are not self-employed, the Internal Revenue Service (IRS) allows you to count medical and dental insurance premiums (and with some limitations, long-term care insurance premiums) as part of the 7.5 percent of your adjusted gross income (AGI) that has to be spent on health care before any out-of-pocket medical expenses can be deducted.

A long list of health-related expenses can be included be deducted, including prescription medications and optional surgical procedures, like laser eye surgery to correct vision. The IRS has a list on its website. Keep track of the out-of-pocket expenses you incur during the year - including health insurance premiums if you're buying your own plan but are not self-employed. If your total costs exceed 7.5 percent of your AGI, you'll be able to deduct the costs above that threshold.

So for example, if your AGI is $50,000 and you spend $8,000 on medical costs, including health insurance premiums that you pay yourself, you'd be able to deduct $4,250 worth of medical expenses on your tax return (7.5 percent of $50,000 is $3,750, so you'd be able to deduct the amount in excess of $3,750 in this scenario).

Note that the 7.5 percent threshold used to be the standard, but the ACA increased it to 10 percent (it remained at 7.5 percent for people age 65 and older, through the end of 2016). However, the GOP tax bill (the Tax Cuts and Jobs Act) that was enacted in December 2017 resets the threshold to 7.5 percent for all tax filers, for 2017 and 2018. So instead of having to spend more than 10 percent of your income on medical costs (including premiums) in order to qualify for a deduction, you now have to spend more than 7.5 percent. This will expire at the end of 2018, however, and will revert to 10 percent for all tax filers. Starting in 2019, only medical expenses that exceed 10 percent of income will be eligible for the deduction.

In order to deduct medical expenses, you have to itemize your deductions. This is in contrast to the two scenarios described above—the self-employed health insurance premium deduction and the Health Savings Account deduction—both of which can be utilized regardless of whether you itemize deductions.

This is just an overview of how the IRS treats health insurance premiums. If you have questions about your specific situation, but sure to speak with a tax advisor.

Sources:

UC Berkeley Labor Center. Modified Adjusted Gross Income Under the Affordable Care Act. July 2014.

House.gov. Text of the Tax Cuts and Jobs Act (H.R.1), enacted December 22, 2017.

Internal Revenue Service, Publication 502 (2015).

Internal Revenue Service, Revenue Procedure 2015-30

Internal Revenue Service, Revenue Procedure 2016-28

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