Your health insurance premiums are tax deductible if you pay for your health insurance. Otherwise, they’re not if your employer pays for your insurance.
The rules on whether or not your health insurance premiums are tax deductible are complicated and can have a huge impact on how much you owe Uncle Sam. It all depends on several things. This article takes a keen look at when and how health insurance premiums are tax deductible and when they’re not.
Health insurance premiums and other medical expenses aren’t tax deductible unless you pay for them out-of-pocket. This means that the premiums aren’t tax deductible if an employer or the government pays for them. You can’t also claim tax deductible on tax credits that decreased the cost of your premiums.
The basis of this information is derived from the IRS as well as other reliable sources including the Kaiser Family Foundation. We’ve also provided accurate calculations to help understand and determine how to lower your taxes through health insurance premiums.
What is Tax Deductible?
Before looking at whether or not your health insurance premiums are tax deductible, it’s of great importance to have a clear understanding of what tax deductible means. According to the IRS, tax deductible or tax deduction is the reduction of income that can be taxed.
Tax deductibles generally occur as a result of expenses, especially if they’re incurred to produce extra income. They’re seen as a form of tax incentives and are essential in reducing your taxable income as well as the tax that you owe the IRS.
As such, it’s advantageous for your health insurance premiums to be tax deductible. This would mean that you can use your premiums to lower your income amount that the IRS can tax. However, health insurance premiums can either be tax deductible or not tax deductible depending on who paid for them.
Are Health Insurance Premiums Deductible?
It’s of great importance to be very clear on this: health insurance premiums are generally tax deductible under federal laws. But there’s a caveat: you can only deduct the premiums that you pay for and not what your employer or the government pays for. In short, the part of your health insurance premiums that your employer or government pays for cannot be deducted from your taxable income.
The general rule is that Uncle Sam can only allow you to deduct your health insurance premiums and other medical expenses from your taxable income if you pay for your premiums and other medical expenses with out-of-pocket money.
With that in mind, let’s look at instances when health insurance premiums aren’t tax deductible and when they’re tax deductible.
When is Health Insurance Premiums Not Tax Deductible?
There are two instances when you cannot take a tax deduction on your health insurance premiums:
- Someone else paid on your behalf and
- You paid the premiums with pre-tax money
Let’s go into the details.
Someone Paid the Health Insurance Premiums on Your Behalf
Of course, there are instances when someone else can choose to pay your health insurance premiums. For example, your employer or the government can pay your health insurance premiums. Well, under such circumstances, the health insurance premiums won’t be tax deductible.
If you pay part of your health insurance premiums and your employer pays the other part, you cannot claim a tax deduction for the part that your employer paid. The idea here is that the employer has already classified the premiums that he/she paid on your behalf as part of his/her expenses and it is tax deductible on his/her side. As such, the IRS would be losing money twice if you were to claim a tax deduction on the same.
Similarly, the part of the premium that you pay is most likely taken out of your check before tax. This would then mean that deducting it when you file your taxes would be double-dipping and the IRS would be losing money.
The table below is an example showing the tax deductible amount if your employer is paying part of your health insurance premiums or the full amount.
From the above table, it’s easy to see that part of your health insurance premiums that are paid by your employer isn’t tax deductible. It doesn’t matter whether the employer pays part of the premium or covers the entire amount; it cannot be used to reduce your taxes. As such, the amount of health insurance premium that you pay out-of-pocket is tax deductible and can be used to lower your taxes.
Again, there are instances when you can get a tax credit or subsidies from the government when buying health insurance. Well, the IRS stipulates that any money or credit from the government that decreases the cost of your health insurance premiums cannot be claimed as a tax deduction.
The idea here is that the money or subsidy from that government is already a tax credit as it comes from the government coffers. As such, that amount will not be included in your tax deduction since it’s from the government and not from your own money.
Here’s an example of the amount of health insurance premiums that will be tax deductible if you qualify for government subsidies or premium tax credit.
The table above clearly shows that part of your health insurance premium that is covered by government subsidies isn’t tax deductible. This means that you can only claim tax deductions on the amount that you pay out-of-pocket.
You Paid Health Insurance Premiums with Pre-Tax Money
Generally, the health insurance premiums that you pay for employer-based health insurance are normally deducted from your paycheck pre-tax or before your taxes are calculated. And because the premiums were paid before you were taxed, it means that the money used to pay the premiums is already tax-free, so you can’t claim the premiums to be considered tax deductible expenses.
In most cases, job-based health insurance premiums are often paid with your pre-tax money. However, you should confirm with your payroll department and do a bit of math to be sure.
If your premiums are paid with after-tax money, it will be included as income on your W-2 form and is tax deductible. Contrarily, if your health insurance premiums are paid with pre-tax money, that money will not be included in your W-2 form as income and cannot be tax deductible.
When is Health Insurance Premiums Tax Deductible?
Here are a few situations when your health insurance premiums are tax deductible.
If You are Self-Employed
Generally, you will not be eligible for employer-sponsored health insurance if you’re self-employed. So if you’re self-employed, the IRS allows you to claim tax deductions for the health insurance premiums and expenses you incur for yourself, your spouse, and your dependents.
You should, however, keep in mind that you may not be able to claim tax deductions if your health insurance is being paid through your spouse’s job even if you’re self-employed. In other words, you have to prove that the health insurance premiums are coming from your income in self-employment.
You can report self-employment income on Schedule S if you’re a sole proprietor of a business and on Schedule F if you’re a farmer. You can also claim the deduction if you are a general partner in a partnership or an actively participating member of an LLC.
More importantly, you cannot claim more in health insurance tax deductible than you earned from your self-employment. Health insurance premiums deduction for self-employment is taken on Part II (Adjustments to Income) line 16. This means that the health insurance premiums tax deductible can help in reducing your Adjusted Gross Income (AGI).
Standard Deductions vs. Itemized Deductions
As a taxpayer, the IRS offers you two options to choose how to claim and file your annual tax return:
- Standard Deductions
- Itemized Deductions
But what do they really mean? Well, let’s have a look.
The standard deduction is a flat-dollar amount that can lower your Adjusted Gross Income (AGI). You are not required to offer proof of the expenses, so you don’t have to hold on to receipts.
On the other hand, itemized deductions are qualified expenses such as your health insurance premiums and other medical expenses that decrease your AGI. Itemized deductions can be more advantageous than standard deductions if the expenses are quite high as they can be used to lower your taxes. You’ll, however, have to keep the receipts to be shown as proof if you choose the itemized deductions option.
Keep in mind that it’s impossible to claim both standard and itemized deductions. For this reason, it’s important to calculate the total amount of itemized deductions as well as the total amount of standard deductions. You can then compare the two and choose the one which offers more tax break.
In essence, both standard deductions and itemized deductions are essential in lowering your taxes based on your AGI, which is basically the amount that you earn in a particular year minus any payments for student-loan interest, payment for alimony, and other costs.
As you can see, itemized deductions may fluctuate depending on your health insurance premiums and medical expenses. But for 2020 taxes to be filed in 2021 and 2021 taxes to be filed in 2020, here are the standard deductions to expect:
From the above table, you can see that your standard deduction is a flat-dollar reduction on your AGI. By taking a standard deduction, you’ll be opting out of itemized deductions as you cannot take both.
The best part of choosing the standard deduction is that it makes your tax calculations a lot simpler. Let’s offer an example in the table below by assuming that your AGI is $80,000 for 2021.
As far as itemized deductions are concerned, you can be allowed a tax deduction for your health insurance premiums and other medical expenses if the total amount exceeds 10% of your AGI. Here is a perfect example.
Let’s say that your AGI for 2020 was $90,000. The first thing to do is find your threshold which is $9,000 (10% × $90,000). So let’s say that the total amount of your health insurance premiums plus other medical expenses is $8,000. This would be about 8.8% of your AGI and you wouldn’t be able to deduct it from your taxable income since it doesn’t exceed the $9,000 threshold.
On the other hand, let’s assume that your health insurance premiums and other medical expenses total $12,000. Well, this would mean that your medical expenses exceed the $9,000 IRS threshold based on your AGI by $3,000 ($12,000 - $$9,000). As such, you’ll be able to claim a $3,000 deduction on your tax return.
Itemized Deduction for the Self-Employed
Your allowable medical expense IRS threshold for itemized deductions decreases to 7.5% if you’re self-employed. Here’s an example. Let’s say that your AGI for 2020 was $90,000, you’d be able to deduct any amount that exceeds $6,750 (7.5% × $90,000). So if your health insurance premiums and other medical expenses total up to $8,500, you’ll be able to claim a $1,750 deduction on your tax return.
On the other hand, itemized deductions work differently if you are an independent contractor and able to receive self-employed health insurance deductions. For example, if you’re a self-employed contractor with an AGI of $90,000 and pay health insurance premiums of $6,000, these premiums would reduce your AGI to $84,000 ($90,000 - $6,000).
As you can see, this is different from the allowable medical expense threshold set by the IRS since the health insurance premiums would directly affect your AGI and shouldn’t be added with other expenses that you incurred.
Other Tax Deductible Medical Expenses
It’s important to note that the IRS will allow you to claim deductions on any medical expense that you pay out-of-pocket as long as they were ordered by the doctor. While here is a complete list of the tax deductible medical expenses, the following are the most common expenses that are tax deductible.
- Dental insurance
- Long-term care
- Prescription drugs
- Hearing aids
- Prescription glasses
- Birth control
- Contact lenses
- Medical appointments
- Medical tests
The IRS also allows you to deduct the travel costs that you incur when going to get medical care.
Medical Expenses that aren’t Considered Tax Deductible
Any type of medical expenses that you will be reimbursed for such as copays are not considered tax deductible. Again, cosmetic expenses and procedures such as hair transplants and other cosmetic surgeries are generally not considered to be related to your health and cannot be added toward your tax deductions.
The idea here is that they aren’t meant to treat or improve any underlying medical condition and, therefore, are not tax deductible. You cannot also claim any tax deduction on non-prescription drugs or general health purchases such as diet foods, vitamins, and toothpaste. This is to prevent people from claiming tax deductions on items that don’t treat any underlying medical condition.