If your health insurance is tax deductible, taking a tax write-off for health insurance premiums can have a big impact on how much you owe Uncle Sam. However, the rules about when health insurance is tax deductible and how much can be deducted are complicated. Here’s a primer on the tax deduction for health insurance.
When Health Insurance Isn’t Tax Deductible
You can’t take a tax deduction for health insurance unless you paid for it.
If someone like an employer or the government pays your health insurance premiums, those premiums aren’t deductible. If your employer pays part of your health insurance premiums and you pay the other part, you can’t claim a deduction for the part your employer paid.
Did you buy individual or family health insurance on an Affordable Care Act health insurance exchange?
Any advanced-payment subsidy money that decreased the cost of your health insurance premiums can’t be claimed as a deduction. While the advanced-payment subsidy money can’t be claimed as a deduction, the premium money you paid out of your own pocket might be deductible. You’ll learn more about that later.
You can’t take a deduction for health insurance you paid for with pre-tax money.
The premiums you pay for job-based health insurance usually come out of your paycheck before your income taxes are calculated. This makes your income appear smaller, similar to the way money you contribute to your 401(K) retirement savings makes your income appear smaller. Since these premiums were paid with pre-tax money, they’re already income-tax-free; you can’t claim them as a deductible expense.
Not sure if your health insurance premiums are taken out of your paycheck pre-tax or after-tax? You can either ask your payroll department, or do a bit of math. If your premiums are paid with pre-tax money, that money won’t be included as income on your W-2. If your premiums are paid with after-tax money, that money will be included as income on your W-2.
If your premiums weren’t included as income on your W-2, you can’t take them as a deduction because they’re already tax-free.
When Health Insurance Is Tax Deductible
If you’re self-employed, your health insurance premiums may be deductible.
If you’re self-employed and not eligible for an employer-sponsored health plan through your spouse’s job, you may be able to write-off your health insurance premiums. You can’t write off more in health insurance premiums than you earned, though.
Rather than listing your health insurance premiums with your other tax deductions on Schedule A, when you’re self-employed they’re considered an adjustment to your income and listed on the first page of Form 1040. This has the effect of decreasing your overall income.
In some ways, this adjustment-to-income approach is better than a traditional deduction.
- If you don’t itemize your deductions, you’ll still benefit from the income-adjustment for your health insurance premiums.
- Many deductions are phased out at higher income levels. Decreasing your income by the amount of your yearly health insurance premiums may help you stay beneath the phase-out level for other deductions.
- Many deductions can only be taken if they exceed a certain percentage of your income. The smaller your income appears, the easier it is to exceed that threshold and claim those deductions.
Learn more about the tax write-off for health insurance for the self employed from About.com's Tax Planning Expert in "Self-Employment Health Insurance Deduction."
If you paid your health insurance premiums with your own after-tax money, they’re deductible.
For example, if you bought an individual or family health insurance policy on your state’s health insurance exchange or directly from an insurance company, the money you paid toward your monthly health insurance premiums can be taken as a tax deduction. You’ll list this deduction as a medical expense on Schedule A of Form 1040. However, the deduction may be limited. You'll learn more about this limitation below.
Some Medicare premiums are tax deductible.
Medicare Part B, Part D prescription coverage, and Medigap supplemental premiums are deductible.
Medicare Part A premiums are a bit trickier. If you’re covered under social security, you get Medicare Part A automatically because you or your spouse paid payroll taxes for it while you were working. This is the case for most people, and in this case, there’s nothing you can deduct for Medicare Part A.
You may be able to deduct your Medicare Part A premiums, however, if you and your spouse:
- didn’t pay Medicare taxes while you were working, and
- you’re not covered under social security, and
- you voluntarily enrolled in Medicare Part A, and
- you pay monthly Part A premiums.
The Amount of Your Health Insurance Tax Deduction Is Limited
If you’re able to take a write-off for health insurance, there are limits to how much of your premiums you can write off.
If you’re taking your health insurance as a medical-expense deduction on Schedule A, you can only deduct medical expenses that exceed 10% of your adjusted gross income. (Until 2017, this figure is only 7.5% for seniors age 65 and older.)
Add up your health insurance premiums and all of your eligible unreimbursed medical expenses like your deductible, copays, and coinsurance. If all of those together are greater than 10% of your adjusted gross income, you can deduct the part that exceeds 10% of your income. Learn more about the medical-expense deduction, including what other expenses count toward it, in "How To Write Off Medical Expenses as a Tax Deduction."
If you’re self-employed and claiming the self-employed health insurance deduction on Form 1040, you don’t have to exceed the 10% mark because you’re writing the premiums off as an adjustment to your income rather than as a deduction. In your case, the amount you can claim is limited by your profitability. You can’t claim an adjustment to your income for health insurance premiums that are larger than your income.
I’m an RN and a health insurance expert, not a tax attorney, CPA, or other tax professional. As such, the information presented in this article shouldn't be considered tax, financial, or legal advice. Instead, it should be used to help clarify what you need to seek professional tax advice about. Seek the advice of a tax professional, or get more information about the tax deduction for health insurance premiums directly from the IRS in Publication 502 before taking financial action.
