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Can Health Insurance Premiums Be Deducted on Taxes?

Health insurance premiums are tax-free in those with group plans.

For some American residents, health insurance is one of their largest monthly costs. As the price of healthcare rises, some customers are seeking out ways of reducing their costs through tax breaks on their monthly health insurance premiums.

If you are registered in an employer-sponsored health insurance plan, your premiums may already be tax-free. If your premiums are made through a payroll deduction plan, they are likely made with pre-tax dollars, so you would not be permitted to claim a year-end tax deduction.

Nevertheless, you may still claim a deduction if your total healthcare costs for the year are high enough. Self-employed individuals may be eligible to write off their health insurance premiums, but only if they meet certain criteria.

If your medical premiums are deducted through a payroll deduction plan, it is more than likely that you are covering your share of your insurance premium with pre-tax dollars. If you deduct your premiums at the end of the year, you would effectively be deducting that expense twice.

Deductions for Qualified Unreimbursed Healthcare Expenses

Nevertheless, you may be able to deduct some of your premiums if you buy health insurance using after-tax dollars. For the 2019 tax year, you are allowed to deduct any qualified unreimbursed healthcare expenses you paid for yourself, your spouse, or your dependents—but only if they exceed 10% of your adjusted gross income (AGI).

AGI is an alteration of your gross income. It consists of all your sources of income—wages, dividends, alimony, capital gains, interest income, royalties, rental income, and retirement distributions—minus any number of allowable deductions from your income, as well as retirement plan contributions, student loan interest payments, losses incurred from the sale or exchange of property, early-withdrawal penalties levied by financial institutions, among others.

Costs that qualify for this deduction include premiums paid for a health insurance policy, as well as any out-of-pocket expenses for things such as doctor visits, surgeries, dental care, vision care, and mental health care. Nevertheless, you can deduct only the expenses that exceed 10% of your AGI.

Ensure you don’t include any reimbursed expenses when doing your calculation, such as premium tax credits. Some people are eligible for premium tax credits if they have bought their insurance through the Health Insurance Marketplace.

The Marketplace is a platform for individuals, families, or small businesses to buy health insurance, and it was created as a result of the Affordable Care Act in 2010 as a means to attain maximum compliance with the mandate that all Americans carry some form of health insurance. If your purchase health insurance through the exchange, you may receive income-based government subsidies that help cover the cost of premiums sold on an exchange.

You should also leave off any costs that were reimbursed by your insurance company or your employer.

Deductions for the Self-Employed

There is an exception made to the 10% rule for people who run their own businesses. If you are self-employed, you are allowed to deduct the entirety of your premium payments. Nevertheless, if you are qualified to participate in another employer’s plan and elect not to, you cannot take this deduction. If you are self-employed, but you have other work, that may preclude you from this deduction.

Likewise, if you are eligible to receive coverage through a spouse’s employer-sponsored plan, this may also preclude you from this deduction.

There are also constraints imposed on self-employed individuals depending on the amount of their business income. In any given year, a self-employed person can’t deduct more than the amount of income they generate through their business operations.

People who operate more than one business can designate only one of them as the health insurance plan sponsor; you can’t add up the income generated by multiple companies to claim the maximum deduction. In the case of self-employed persons, it may be in their best interest to select their most profitable business as the plan sponsor to increase their potential amount of tax relief.

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References and Resources

• Adjusted Gross Income
• Self-Employment
• Plan Sponsor