Health insurance premiums and medical expenses are tax deductible only if you pay for them out-of-pocket. Furthermore, your financial situation, along with where you receive health insurance from, will play a large part in determining if the costs will be eligible for tax deductions.
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For example, if you are self-employed, your allowable tax deductions would differ from someone who receives medical coverage through a group employer-sponsored plan. When submitting a filing for tax deductions, the IRS allows you to select a standard deduction or itemize your medical expenses. The option you choose will depend on how many medical expenses you have incurred during the past year.
Are Health Insurance Premiums Deductible on Federal Taxes?
Health insurance premiums are deductible on federal taxes, as these monthly payments for coverage are classified as a medical expense. The general rule is that if you pay for medical insurance with out-of-pocket money, then you would be allowed to deduct the amount from your taxes.
For example, you would be able to take a tax deduction if you bought a federal marketplace health insurance plan and did not receive premium subsidies. Since the premiums for this Obamacare policy would be paid out-of-pocket, you could deduct the expenses while filing your taxes. If you did receive premium subsidies, then only the portion that you pay yourself would be allowed to be deducted. Below, we have identified some of the typical sources where you may get your health insurance from and if there are tax deductions available.
Health Insurance Source
Would Health Insurance Be Deductible?
|Employer-Sponsored||Premiums for company health insurance are not tax deductible. Employers take out premium payments from your payroll on a pre-tax basis. Therefore, your employee contributions are already taking advantage of the tax-savings and would not be allowed to further deduct these costs. Similarly, health savings account (HSA) contributions are paid on a pre-tax basis and would not be tax deductible.|
|COBRA Insurance||COBRA insurance is a health plan that allows you to continue employer-sponsored insurance coverage even if you no longer work for that company. Premiums for COBRA insurance are tax deductible, as they are paid entirely by you on an after-tax basis.|
|Marketplace||If you buy medical coverage through an insurance marketplace, then premiums would be tax deductible as a medical expense. It is important to note that if you are eligible to enroll in a spouse's employer's plan and opt out of that coverage, then you would not be able to take the tax deduction.|
|Medicare||Premiums for Medicare Part B, C or D along with Medigap coverage are tax deductible. Medicare part A would not be tax deductible if Social Security pays for the premiums.|
Standard Deduction vs. Itemized
Tax deductions are claimed and filed through your yearly tax return that is sent to the IRS for review. The IRS offers two options for declaring deductions, which include either taking the standard deduction or itemizing your medical expenses. Both will ultimately reduce your adjusted gross income (AGI) and therefore mitigate the amount of taxes that you would pay. AGI is the amount you earn in a given year minus any payments for alimony, student-loan interest and other costs. Recently, the Tax Cuts and Jobs Act has increased the standard deduction amounts along with suspending some of the itemized deductions available to you. For 2019, the standard deduction amounts are:
Standard Deduction Amount
|Head of household||$18,650|
|Married filing jointly||$24,800|
|Married filing separately||$12,400|
As shown above, depending on your situation, the standard deduction is a flat-dollar reduction of your AGI. When you take this deduction, you are essentially opting out of itemizing deductions. The biggest benefit to the standard deduction is that it makes the tax-prep process much simpler. For example, if you are single, have an AGI of $70,000 and decide to take the standard deduction, then your taxable income would be $57,600.
For 2020, taxpayers who decide to itemize can only deduct allowable medical expenses that exceed 10% of their AGI. For example, if you had an AGI of $100,000 and health insurance premiums of $9,000, you would not be able to deduct because the premiums did not exceed 10% of your net AGI ($100,000 x 10% = $10,000 threshold). But suppose you had another $2,000 in medical expenses along with your $9,000 in health insurance premiums. This would be a total of $11,000, which would exceed the $10,000 IRS threshold based off of your AGI. Therefore, you would be able to claim a $1,000 deduction on your tax return.
Self-Employed Health Insurance Deduction
If you are self-employed, then your allowable medical expense threshold decreases to 7.5%. In this case, if your AGI was $100,000, then you would be able to deduct any medical expenses that exceeded $7,500.
Independent contractors also are able to receive the self-employed health insurance deduction. This allows any health insurance premiums to directly reduce a self-employed person's AGI. For example, if you are self-employed, have an AGI of $100,000 and pay premiums of $5,000, then those premiums would immediately reduce your AGI to $95,000. This is different from the allowable medical expense threshold, because your premiums would instead directly affect your AGI and not need to be added with other expenses that you incurred.
Do I Take the Standard Deduction or Itemize My Expenses?
The decision to take the standard deduction or to itemize will ultimately be decided upon your own financial situation. Furthermore, choosing one or the other is not permanent, and you are able to change every year when you file your taxes. To determine what would work best for you, we suggest looking at the Schedule A 1040 Form. Here you can add up your itemized expenses and then compare that number with the standard deduction that would apply to you. If your itemized expenses are larger than your standard deduction amount, then you would be able to save money by taking the time to itemize your expenses.
For instance, suppose this year you paid your health insurance premiums and had several costly medical expenses like prescription glasses and medical tests. If your total health care costs pushed you to exceed the normal standard deduction you qualify for, then it would make sense to itemize so that you can get the greatest tax savings.
Other Medical Expenses That Are Tax Deductible
The IRS will let you take a deduction on any medical expenses paid out of your own pocket that were ordered by a doctor or health care professional. For a complete list of acceptable medical expenses, you can visit the IRS.gov website. But, some common expenses include:
- Long-term care
- Dental insurance
- Medical appointments
- Prescription drugs
- Medical tests
- Hearing aids
- Prescription glasses
- Contact lenses
- Birth control
Along with these direct medical expenses, the IRS will also allow you to deduct any travel costs that you may have incurred when going to get medical care. For example, if you have a physical therapy appointment that is one hour from your residence, you could deduct the cost of gas as a medical expense.
What Can I Not Deduct from My Taxes?
Any medical expenses that you are reimbursed for, like copays, would not be allowed to be deducted. As mentioned above, premium tax credits also fall under this category, as these credits allow you to reduce the health insurance costs that you would pay.
In addition, cosmetic expenses or procedures that are not related to your health would not count toward tax deductions. This can include hair transplants or other cosmetic surgeries that are not for the purpose of improving some underlying medical condition. Finally, you would not be able to deduct expenses for non-prescription drugs or general health purchases like toothpaste, vitamins or diet foods.