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Is Health Insurance Tax Deductible?

Is Health Insurance Tax Deductible?

If your health insurance is tax-exempt, the cancellation of taxes on your health insurance premiums can have a significant impact on the amount you owe to Uncle Sam. However, the rules about when health insurance is tax deductible and how much can be deducted are complicated. Here's an introduction to the health insurance tax deduction.

There is no deduction for fees someone else paid on your behalf

You can't take a health insurance tax deduction unless you pay it. If someone like your employer or the government pays your health insurance premiums, these premiums are not deductible. If your employer pays part of your health insurance premiums and you pay the other, you cannot claim a deduction for the part that the employer paid (and in almost all cases, the part you pay of your check is taxed before taxes, which means you won't be able to). Deduct it from your tax return, because that would be a double drop.)

Have you purchased individual or family health insurance through the Affordable Care Act Health Insurance Exchange? Any prepaid support money that has lowered the cost of your health insurance premiums cannot be claimed as a deductible, because it is actually a tax credit. While it is not possible to claim a portion of your premiums that are paid through the premium tax credit as a deduction, the amount of the premium you paid can be deducted out of pocket. You will learn more about that later.

There is no deduction for the premiums you paid with pre-tax funds

The premiums you pay for employment-based health insurance generally come from your wages before your income taxes are calculated. This makes your income appear smaller, similar to the way money contributes to your retirement savings. 401 (K) makes your income appear smaller. Since these fees were paid with money before taxes, they are already exempt from income tax; You cannot claim it as a deductible expense.

Not sure if your health insurance premiums were deducted from your payment before taxes or after taxes? Employer-sponsored health insurance premiums are often paid with pre-tax money, but to double-check, you can ask the payroll department or do a little math. If your insurance premiums were paid with pre-tax funds, that money will not be included as income on your W-2. If your dues are paid with after-tax money, that money will be included as income on your W-2. If your premiums are not included as income on your W-2, you cannot take them as a deduction because they are already tax deductible (even if they are paid with after-tax money, which is very rare, the ability to deduct them will be limited, as it's shown in the following).

When health insurance is tax exempt

There are some cases in which health insurance is tax deductible.

You own a business

If you are self-employed, your health insurance premiums may be deductible.

If you are self-employed and don't qualify for an employer-sponsored health plan through your husband's job (or another job you may have), you may be able to drop your health insurance premiums. This includes spouse and dependent premiums as well, and may include Part A, Part B, Part C (Medicare benefits), and Part D. health insurance. But you can't pay more health insurance premiums than you earned in your own business.

The health insurance deduction for self-employed workers is taken on Table 1 of Form 1040 (Line 16 of Schedule 1 of 2020 for Form 1040). This makes it an "above the line" deduction, which means it reduces adjusted gross income.

There are several advantages of taking the health insurance discount for the self-employed:

  • If you don't itemize your deductions, you still benefit from adjusting income to your health insurance premiums (and very few people separate now that the Tax Cuts and Jobs Act has increased the standard deduction drastically).
  • Many deductions are phased out at the highest income levels. Reducing your income by the amount of your annual health insurance premiums can help you stay below the phasing out of other deductibles. This could include eligibility for premium tax credits, which can help offset the cost of your health insurance. But this can also be a circular process, as the amount paid through various tax credits cannot also be deducted through the self-employed health insurance deduction. The IRS has a process to determine the amount of your deductible and premium benefit in these types of circumstances.
  • Some deductions can only be taken if they exceed a certain percentage of your income. The lower your income, the easier it will be to exceed this limit and claim these deductions.

Pay your insurance premiums and itemize your deductions

If you pay your health insurance premiums out of your own money after taxes, it may be deductible depending on how much you spend and if you itemize your deductions (this assumes you are not a business owner; if you are, you are not. itemize a deduction from health insurance premiums (Your own, as shown above).

For example, if you purchased an individual or family health insurance policy through a health insurance exchange in your state or directly from an insurance company, you may be able to include the money you paid (out of pocket, without include premium support that was paid on your behalf) in exchange for premiums. Monthly health insurance as an itemized tax deduction. However, the deduction for total medical expenses (including premiums) is limited and the amount you can deduct will depend on your income. You will learn more about this limitation below.

Some Medicare premiums can be calculated toward your total medical expenses. You may be able to deduct a portion of your total medical expenses by itemizing your deductions, as shown below. Medicare Part B, Part C (Medicare Advantage), Part D prescription drug coverage, and Medigap supplemental premiums count toward your total medical expenses. (Note that Medigap premiums cannot be deducted under the self-employment health insurance deduction, described above. But they can be included as the total medical expenses of the individuals who will itemize your deductions).

Most people do not pay a premium for Medicare Part A. But if you do, you can figure it into your total medical expenses. If you are covered by Social Security (even if you haven't started collecting your retirement benefits yet), you automatically receive Medicare Part A when you turn 65, without any premium, because you or your spouse paid payroll taxes while working . This is the case for most people, and in this case, there is nothing you can deduct from Medicare Part A.

You may be able to deduct your Medicare Part A premiums if you and your partner:

  • You have not paid Medicare taxes for at least ten years while working, and
  • You voluntarily enroll in Medicare Part A and
  • You pay the monthly Part A fees.

Your health insurance deduction is limited

If you can get an itemized deduction for health insurance, there are limits to the amount of your premiums that you can write off.

If you itemize your deductions and include your health insurance premiums as a deduction for medical expenses, you can only deduct medical expenses that exceed 7.5% of your adjusted gross income (this threshold increases to 10% after the end of 2020).

Add up your qualifying health insurance premiums and all of your eligible unpaid medical expenses, such as deductibles, mutuals, and coinsurance. If all of these together exceed 7.5% of your total adjusted income, you can deduct the portion that exceeds 7.5% of your income. This amount will be included with the other detailed discounts you have. But keep in mind that very few people find it helpful to break down discounts now that the standard opponent is so much bigger than before.

If you are self-employed and claim a self-employed health insurance deduction on Schedule 1 of Form 1040, you don't need to worry about 7.5% of your income threshold, because you withdraw premiums as an adjustment to your income on instead of as a deduction. In your case, the amount you can claim is limited by your earnings. You cannot claim that your income matches health insurance premiums that are greater than the income you generate through self-employment. But as long as you have the income to back it up, you can include the total amount you paid for your health insurance and it will be deducted from your income before your taxes are calculated. (Note that if you are a shareholder of more than 2% in S-Corp and you purchase health insurance in your name, you can only use the self-employment health insurance deduction if S-Corp pays your insurance premiums and includes reimbursement in your W-2. Status, your opponent is limited to no more than what S-Corp paid you and reported to W-2.1)