Is health insurance tax deductible? Here’s what you can claim. #CashNews.co

If you’re struggling with the high costs of healthcare, you may wonder if health insurance is tax deductible.

You typically can’t claim a medical expense deduction for health premiums if you get coverage through your employer; tax deductions are available for medical expenses for other out-of-pocket costs. To deduct medical expenses, you’ll need to itemize vs. taking the standard deduction.

There’s an exception for self-employed individuals, who can deduct health premiums even if they don’t itemize their returns.

The IRS rules for tax deductions on health costs can get complicated. We’ll walk you through what you need to know before you file your tax return.

How to deduct health insurance premiums and expenses

You can claim a medical expense deduction for unreimbursed healthcare costs that exceed 7.5% of your adjusted gross income (AGI). You’ll use Schedule A to itemize your deductions. You’ll then transfer the amount of your total deduction to IRS Form 1040.

However, itemizing won’t make sense for many taxpayers, even if they have relatively high healthcare costs. That’s because the Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction.

You’d only want to itemize if all your deductions add up to more than the standard deduction for the tax year. The following standard deduction rates apply for 2023 (use these numbers when you prepare your return that’s due on April 15, 2024):

• Single or married filing separately: $13,850

• Married filing jointly: $27,700

• Head of household: $20,800

If you’re not sure whether itemizing or taking the standard deduction makes the most sense, consult with a tax professional.

Rules and requirements

Out-of-pocket medical expenses you paid for yourself, your spouse, and your dependents can be taken as itemized deductions if they total more than 7.5% of your adjusted gross income.

Your health premiums — either through an employer plan or a health insurance policy you purchased on your own — can count toward these costs. (Note that in employer plans, this is a somewhat rare exception, as many employers deduct employees’ share of insurance premiums before taxes are taken out of paychecks. If your premiums are paid with pre-tax dollars, you cannot deduct them.)

Here’s an example of how the 7.5% threshold works.

Let’s say your taxable income for the year was $100,000, and you spent $12,000 on healthcare. You’d be eligible to deduct health expenses because 7.5% of $100,000 equals $7,500 — which is less than you spent on medical care. The IRS would allow you to deduct $4,500 ($12,000-$7,500 = $4,500), not the full $12,000.

Note that any costs you incur that you pay for using a health savings account (HSA) or flexible spending account (FSA) aren’t tax-deductible because you already get a tax break for your contributions.

Deductible expenses

Here are a few examples of expenses the IRS allows you to deduct if you itemize, though this list isn’t all-inclusive:

• Fees paid to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and nontraditional medical practitioners

• In-patient hospital care costs

• Residential nursing home expenses, as long as the person is living in the nursing home primarily for medical care. If medical care isn’t the primary reason someone is residing in a nursing home, only the portion of expenses attributable to medical care are deductible

• Acupuncture treatment

• In-patient drug and alcohol misuse treatment

• Prescription medication and insulin

• Smoking-cessation programs and prescription drugs to treat nicotine withdrawal

• Weight-loss programs if prescribed by a doctor to treat obesity or a medical condition (in limited circumstances, this could include costs of joining a gym or health club)

• False teeth, eyeglasses (both reading and prescription), contact lenses, and hearing aids

• Ambulatory devices, like crutches and wheelchairs

• Costs of a service animal for someone with a visual or hearing impairment

• Transportation expenses related to medical care

• Health insurance (but only if you pay for your own insurance) and long-term care premiums

• Medicare premiums, including Medicare Advantage and Medigap plans

The IRS doesn’t allow you to deduct the following expenses on your tax return:

• The portion of your health premium paid by your employer

• Funeral and burial expenses

• Nonprescription medication, including nonprescription nicotine gum and patches

• Toiletries, cosmetics, and toothpaste

• Most cosmetic surgeries

• Trips to improve general health and wellness

Married couples filing a joint return can each deduct up to the annual limit based on their age. Note that this covers long-term care insurance only. Life insurance costs are not deductible.

How to deduct HSA contributions

If you contributed to a health savings account in 2023, your contributions will lower your taxable income. If you made them through your employer, they’re made on a pre-tax basis, similar to how you’d fund a traditional 401(k). If you fund the account on your own, the contributions are tax-deductible, even if you take the standard deduction. You can only contribute to an HSA if you’re enrolled in a high-deductible health plan (HDHP).

An HSA offers a triple-tax advantage when you save money for medical and dental expenses: You contribute pre-tax dollars, and the account’s earnings aren’t taxed, either. Any withdrawals you make for qualifying medical expenses are tax-free, as well.

You’ll use Line 9 of Form 8889 to report HSA contributions made through employer payroll deductions. (If you funded your HSA directly, you’d use Line 2 instead.) Note that the form will ask for “employer” contributions, which include any money you or your employer deposited in the account. Look for this information in Box 12, Code W, on your W-2 form.

Health insurance deduction for self-employed taxpayers

You can typically deduct medical and dental insurance premiums for you, your spouse, and your tax dependents if you’re self-employed and have a net profit for the year. This tax write-off is known as an above-the-line deduction, meaning it’s available even if you don’t itemize. Taking this deduction will lower your adjusted gross income.

Eligibility for this deduction is determined on a month-by-month basis. You’re eligible to claim the deduction only for months in which neither you nor your spouse qualified for employer-sponsored health insurance.

For example, suppose you’re a single filer who was eligible for employer health coverage for the first seven months of the year. Then you quit your job to become self-employed, purchased your health insurance plan on the Health Insurance Marketplace, and paid premiums for the remaining five months.

You’d be allowed to take a tax write-off for the five months of premiums you paid but not for the seven months you have job-based insurance coverage. However, the amount you deduct can’t exceed your net income for the year. If you paid $5,000 in health premiums over those five months but only reported $4,000 of profit on your Schedule C, your maximum deduction would be $4,000.

Depending on your income and family size, you may also qualify for premium tax credits when you purchase coverage through the Marketplace. You can opt to have the tax credit paid directly to your insurer to offset your monthly costs, or you can claim the credit at tax time by filing IRS Form 8962.

To claim the tax deduction for self-employed people, you’ll enter the amount of the write-off on Part II of Schedule 1 on Form 1040. You may be eligible for additional small business tax breaks, like the home office deduction or business vehicle expenses, even if you don’t itemize.

FAQs

Are COBRA payments tax deductible?

If you have COBRA insurance, which is continuing coverage through a previous employer, you may be able to deduct your payments if you’re self-employed and neither you nor your spouse qualifies for a job-based health plan. Otherwise, you can deduct COBRA payments only if you’re itemizing and your overall unreimbursed out-of-pocket medical expenses make up more than 7.5% of your AGI.

Does health insurance reduce taxable income?

Health insurance often reduces taxable income because the amount employees pay toward premiums is usually excluded from taxable income. Unreimbursed medical expenses above 7.5% of AGI can lower your taxable income if you itemize your return. Self-employed people can also reduce their taxable income by deducting the full cost of health premiums as long as they (and their spouse, if married) aren’t eligible for employer coverage.

Is it worth claiming medical expenses on your taxes?

It depends on whether all your itemized deductions (including unreimbursed medical expenses, along with deductions for things like mortgage interest and charitable contributions) add up to more than the standard deduction. If your itemized deductions, including unreimbursed medical expenses above 7.5% of AGI, are higher than the standard deduction for your filing status, it’s worth claiming medical expenses on your taxes. If your deductions are less than the standard deduction, it’s best to stick with the standard deduction and forgo claiming medical expenses.