There are tax benefits available to self-employed individuals who pay health insurance costs. Self-employed taxpayers can deduct 100% of their health insurance costs in computing their income taxes.
Let’s review the tax rules on health insurance premiums. Health insurance premiums paid by non-self-employed taxpayers are deductible as itemized medical expense deductions, but only to the extent your total medical expenses exceed 7.5% of your adjusted gross income (AGI). For tax years ending after 2018, medical expenses will be subject to a 10%-of-AGI floor, instead of the 7.5%-of-AGI floor.
Because of the “floor” that applies to the medical expense deduction, if total medical expenses don’t exceed 7.5% of AGI (or 10% after 2018), no itemized deduction is available. Also, with the increased standard deduction there will be fewer taxpayers that can itemize so it more advantageous to deduct these premiums through the business if possible.
A self-employed taxpayer can deduct medical insurance premiums -as an “above the line” deduction, reducing taxable income for 100% of the health insurance costs for the taxpayer, spouse, and dependents.
The health insurance deduction for self-employed taxpayers only applies for any calendar month in which you aren’t otherwise eligible to participate in any other subsidized health plan.
Also, the deduction can’t exceed your earned income from the trade or business for which the health insurance plan was established.
These rules also apply to sole proprietors, partners in partnerships and more-than-2% shareholders of S corporations where the company pays for health insurance coverage for its owners, partners or shareholders.
The tax benefits of a self-employed individual’s health insurance costs can effectively reduce your cost of health insurance. You may wish to consider stepping up your coverage considering these savings. Contact us if you wish to discuss how these rules apply to your particular situation or if you have any questions.
This is another Question ForMy Account. If you have a question or need personal income tax services in Clearwater, Largo, Dunedin, Oldsmar, Lutz or Land O’ Lakes, contact FMA, C.P.A. and let us show you the way!
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When tax season rolls around, the question comes up: is health insurance tax-deductible? Health insurance premiums are tax deductible, but only if your total health care expenses, including premiums, exceed 7.5% of your adjusted gross income, and only the amount above that threshold.
Few taxpayers qualify for the deduction. Additionally, George Birrell, certified public accountant and founder of Taxhub, says the limits and how to apply for them can be confusing. One of the biggest points of confusion is what qualifies as a medical expense and whether your plan's health insurance premiums are tax deductible.
While a self-employed health insurance tax deduction is available to reduce taxable income, there are still restrictions. Read on to learn more about how and when you can deduct health insurance from your taxes.
KEY TAKEAWAYS
- Health insurance premiums are tax-deductible, but only premiums that you pay out of pocket.
- Any portion of your premiums that is paid by your employer is not tax-deductible.
- You can deduct common health care expenses such as medical appointments, surgeries, tests, prescription drugs, and durable items like wheelchairs and home care, from your taxes.
- Over-the-counter drugs, medical marijuana, cosmetic surgery and health care covered by health savings aren't tax deductible.
IN THIS ARTICLE
- Can you deduct health insurance costs on your taxes?
- Who can claim medical expenses on their taxes?
- Which health insurance expenses are tax-deductible?
- How to calculate your medical expense deduction
- Self-employed health insurance deduction
- How to maximize your health care deductions
- What does maximize deductions mean?
- Frequently asked questions about health insurance deductions
Can you deduct health insurance costs on your taxes?
You can deduct eligible medical expenses and health insurance costs that exceed 7.5% of your adjusted gross income (AGI). That includes health insurance premiums.
Not all health care expenses are tax-deductible. For instance, you can’t deduct what your employer pays for your coverage. Another example is when your health plan covers a percentage of your health care services. You can only use what you paid for health care as deductions.
Let’s say you go to the doctor and receive $100 worth of health care services. If your health insurance plan covers 75% of that $100, you can’t deduct the full amount.
This means that you can only write off $25 as part of your costs because your insurance company is covering the rest,” said Jack Choros, content manager at Iron Monk Solutions.
Now, let’s take a look at how to deduct medical expenses and health insurance from your federal income taxes.
Who can claim medical expenses on their taxes?
The Internal Revenue Service (IRS) has two critical eligibility rules for people who don’t own a business:
- A standard deduction is $12,550 for singles, $18,800 for heads of household and $25,100 for married filing jointly. If your tax-deductible health insurance costs don’t exceed those limits, it’s best to go with a standard deduction rather than itemize your health care deductions.
- Your health care costs must exceed 7.5% of your adjusted gross income. The AGI is what you earn in wages, investments and other sources minus things like alimony and student loan interest. You can find your adjusted gross income on line 37 of Form 1040.
So, the first question to answer is: How many eligible health care costs do you have? If your health care costs are less than the standard deduction amount, you should take the standard deduction instead.
Chris Peterson, tax manager at CB Smith & Associates, said most people take the standard deduction rather than itemize health care deductions because they don’t exceed the standard deduction level.
Which health insurance expenses are tax-deductible?
Not everything qualifies for a deduction. So what is a qualified medical expense? Common items you can deduct from taxes include:
- Medical appointments
- Surgeries
- Tests
- Prescription drugs
- Durable items like wheelchairs
- Prescription glasses
- Home care
- Guide dog or service animal
- Wigs for patients who lost their hair due to illness
You can also deduct transportation expenses for going to the doctor -- parking, tolls, mileage, cab or bus fares -- and even airfare and certain lodging costs for out-of-town treatments. (See IRS Publication 502 for a list.)
How much of health insurance is tax-deductible? Only out-of-pocket expenses -- copays, deductibles, etc. You can’t write off the portion of the bills that your health plan or employer paid if you have an employer-sponsored plan.
Alan Steeples, certified public accountant and tax services manager at In Concert Financial Group, said the key to whether something is eligible for tax deduction is if a medical professional prescribed or recommended it. That can even include whirlpools for severe arthritis and air purification systems for patients with asthma. On the flip side, over-the-counter medication and vitamins aren't usually eligible for deductions.
“Rule of thumb: If it’s not prescribed or recommended by a physician, you can’t write it off,” Steeples said.
How to calculate your medical expense deduction
Most people don’t accrue enough medical expenses to make health care deductions worth it.
However, if you do have enough medical expenses, here’s how calculating health care deductions work.
Let’s say you have an AGI of $100,000. So, 7.5% percent of the AGI is $7,500. Any qualifying medical and health care costs beyond that amount are tax deductible.
If you have $15,000 in qualified expenses, you can deduct $7,500 from your taxable income when you file your taxes if you don’t take the standard deduction.
If you have a health plan from the health insurance marketplace, sometimes known as Obamacare, you shouldn’t deduct money for premium tax credits. Those plans often have subsidies like tax credits that reduce the cost of Affordable Care Act plans. You shouldn’t include those subsidies in your deductions.
Self-employed health insurance deduction
Most self-employed people can deduct health insurance premiums as an adjustment to their gross income.
Serrano says self-employed people with a net profit for the year can deduct medical and health expenses without itemizing expenses. He added that there's no need to itemize your deductions because it’s an adjustment to your income.
“These deductions reduce the business owner’s AGI dollar for dollar and can be significantly more advantageous than including their premiums in their itemized deductions,” Steeples said.
There are two requirements to write off health insurance premiums as a self-employed person:
- You can’t have health insurance coverage elsewhere, such as through a spouse.
- You can only deduct up to your net income. If you don’t make any money or have a net loss, you can’t deduct anything. You can’t combine income from multiple businesses, either.
If you don’t deduct 100% of your health insurance premiums on Schedule 1 and you itemize your health insurance deductions, you can add the rest to your health insurance costs for the year on Schedule A. Bear in mind it will be subject to the 7.5% threshold.
How to maximize your health care deductions
You can’t control when you need health care. However, you can bunch up procedures to maximize deductions.
Say you have a handful of nagging health issues. They’re not life-threatening, but they’re affecting your quality of life. You could decide one year to get all of those pesky problems fixed, reach the tax-deductible threshold, and apply for a deduction at tax time.
What does maximize deductions mean?
Maximizing your deductions means that you make the most of the opportunity to use the health care deduction. Once you have crossed the 7.5% threshold, all qualified expenses will start to add up. So, as noted above, if there’s a medical procedure or purchase you have been putting off, you might want to consider getting it taken care of in the current tax year, so that you can get the biggest deduction possible.
Make sure that you carefully document all of your expenses so that you don’t miss any when you add up your deduction.
Frequently asked questions about health insurance deductions
Is it worth claiming medical expenses on taxes?
It depends on how much you’ve spent on health care for the year.
The medical expenses need to exceed the standard deduction and comprise more than 7.5% of your AGI.
So, to file medical expenses, they would have to reach those levels to benefit from claiming medical expenses on your income tax.
Are Health Savings Account contributions tax deductible?
Similar to health insurance premiums, contributions to Health Savings Accounts aren't tax deductible if the money was pre-tax. If the money wasn't taxed, it's not eligible for a tax deduction because, at that point, you would benefit from not paying taxes twice.
Is supplemental insurance tax-deductible?
Yes. You can deduct premiums for supplemental health insurance policies like Medigap or dental insurance on your taxes.