Several Americans consider their health insurance to be one of their biggest monthly expenses, which prompts them to research what medical costs are tax deductible in order to reduce their outlay. As healthcare expenses rise, some consumers are seeking for ways to reduce their spending by qualifying for tax breaks on their monthly health insurance premiums.
If you are covered by a health insurance plan offered by your employer, your premiums may already be tax-free. If you paid your premiums through a payroll deduction plan, they were likely paid with pre-tax money, so you couldn’t claim them as a year-end tax deduction.
Even so, you might be able to claim a deduction if your total yearly medical costs are large enough. Those who are self-employed may be able to deduct their health insurance premiums, but only if they meet certain criteria. 1 In this article, the topic of tax-deductible medical expenses will be explored, along with the requirements for eligibility.
Understanding Health Insurance Costs
Health insurance premiums—the amount paid up front to retain an insurance policy—have been gradually increasing in step with rising healthcare costs in the US.
Premiums might be considered the “maintenance charge” for a healthcare coverage if other payments that consumers are required to make, including deductibles, co-pays, and additional out-of-pocket costs, are not taken into account.
The Affordable Care Act, which was signed into law by President Barack Obama in 2010, provided some families with access to premium tax credits on their health insurance plans, reducing some of the burdens related to steadily growing health insurance premiums.
About half of Americans get health insurance through an employer-based plan, according to research from the Kaiser Family Foundation, a non-profit organization in the US that focuses on healthcare issues.
If your medical expenses are deducted through a payroll deduction plan, you are almost probably utilizing pre-tax money to pay your share of the insurance premium.
4 If you paid your premiums at the end of the year, you would essentially be deducting them twice.
Unreimbursed medical expenses that were eligible for deductions
Nevertheless, you might be able to deduct some of your premiums if you get health insurance on your own and pay with after-tax dollars. For the tax years 2022 and 2023, you can deduct any qualifying medical expenses you paid for yourself, your spouse, or your dependents as long as the amount exceeds 7.5% of your adjusted gross income (AGI).
Your gross revenue changes depending on your AGI. All of your sources of income are included, including salaries, dividends, spousal support, capital gains, interest income, royalties, rental income, and retirement payouts. It does not, however, include any of the income-related deductions you are permitted to make, such as contributions to retirement plans, interest payments on student loans, losses on the sale or exchange of property, or early withdrawal charges imposed by financial institutions.
This deduction is available for the price of a health insurance coverage as well as any out-of-pocket costs for things like doctor’s appointments, procedures, dental work, vision care, and mental healthcare. But, you can only deduct expenses that are greater than 7.5% of your AGI in total.
Finding Your Medical Expenditure Deductions: A Guide
Consider the scenario where your annualized adjusted gross income was $50,000. All allowable expenses in excess of $3,750, or 7.5% of that amount, are deductible. You can deduct $2,250 from your taxable income if your entire medical expenses, including premiums, were $6,000 in total. Make sure to exclude any reimbursed expenses from your calculations, such as premium tax credits. If a person got their insurance through the Health Insurance Marketplace, frequently referred to as “The Marketplace,” they may be eligible for premium tax credits. 7
With the Marketplace, people, families, and small businesses can buy health insurance. It was developed as a result of the Affordable Care Act in 2010 to achieve the highest level of compliance with the requirement that every American carry some sort of health insurance. If you purchase health insurance through the exchange, you may be eligible for income-based government subsidies that help defray the cost of the premiums levied on the market. According to the HealthCare.gov website, you qualify for a premium tax credit if your estimated income is between 100% and 400% of the federal poverty level for your household size. If your income is over 400% FPL, you can still be qualified for premium tax credits that lower your monthly payment for a Marketplace health insurance plan through 2025.
You should also take into account any costs that were covered by your insurance company or employer. You cannot deduct medical expenses using the standard deduction; you must itemize your deductions. 10 So, it is in your best interest to confirm that the sum of your itemized deductions exceeds the standard deduction amount before making this decision.
The standard deduction increases to $13,850 for individuals and $27,700 for married couples filing joint returns for the tax year 2023, from $12,950 for those filing individual returns and $25,900 for those doing so jointly in 2022.
There are typically 11 medical cost deductions available to self-employed people. One of the many tax advantages and deductions available to self-employed people is the right to deduct all premium payments from your adjusted gross income, regardless of whether you itemize. Nevertheless, you might not be qualified for this discount if you are
• Having the requirements to be covered by a spouse’s employer-sponsored plan; • Being self-employed but having another job that offers a health plan; nonetheless, you are entitled to participate in another employer’s plan and choose not to.
Moreover, constraints on self-employed people are based on the sum of their business revenue. A self-employed person may only deduct the actual amount of business income they really get each year. If an individual owns more than one business, only one of them may be chosen to serve as the health insurance plan sponsor; the maximum deduction cannot be calculated by adding the combined gross income of all firms. 125 In order to maximize the amount of potential tax relief, self-employed persons may find it useful to name their most lucrative firm as the plan sponsor.
Some expenses that self-employed people can write off from their income taxes are not deductible when they file on behalf of any of their business operations. In the case of a sole proprietor, for example, the deduction amount would be reported on Form 1040 rather than Schedule C, often known as “Profit or Loss from Business.” 13 More Ways to Lower Your Taxes
If you are unable to deduct your health insurance premiums because you either don’t meet the cost threshold or decide to use the standard deduction while filing your taxes, there are other ways to reduce your overall medical expenses.
You may want to think about implementing a high-deductible health plan (HDHP) as a form of insurance. HDHPs frequently have lower premiums than other plans. Additionally, they offer the unique opportunity for plan participants to set up a Health Savings Account (HSA), a savings account that offers tax advantages. Contributions to an HSA account may be used to pay for out-of-pocket medical expenses.
By selecting an HDHP, you can move more of your overall medical spending into a savings account with significant tax benefits. The more money you can save by using an HDHP, the higher the tax band you’re in. For the tax years 2021 and 2022, the IRS defines an HDHP as an individual insurance policy with a deductible of at least $1,400 or a family policy with a deductible of at least $2,800. 15 A high-deductible health plan is one that offers annual deductibles of no less than $1,500 for self-only coverage or $3,000 for family coverage, as well as out-of-pocket maximums of no more than $7,500 for self-only coverage and $15,000 for family coverage.
Periodically, you could also be able to pay your health insurance premiums with HSA savings. This would suggest that you would pay your insurance payments prior to taxes. This might be possible, for instance, if you’re still temporarily covered by the insurance plan offered by your old company.
After you leave your job or if you become ineligible for insurance coverage through your employer-sponsored plan because you’re working fewer hours, you may be able to maintain group coverage for up to 18 or 36 months (depending on the applicable scenarios) thanks to a provision created by the Consolidated Omnibus Budget Reconciliation Act (COBRA).
Unlike to health insurance via your employer, which often covers a percentage of the cost, when you enrol in COBRA coverage, you typically assume responsibility for paying the full cost of your premiums.
19 Before choosing COBRA coverage, if you had an HDHP with an HSA via your employer, you frequently had the option of taking your HSA account with you and continuing to make contributions to it. As a result, even if your premiums may be higher in this scenario, you still get to pay them using pre-tax funds.
Even if you are receiving unemployment benefits, you may pay your premiums with pre-tax money if you are enrolled in an HDHP and have an HSA account.
Limitations of an HDHP
Even though an HDHP could offer certain tax benefits, not everyone will find it to be a good healthcare alternative. If you have a pre-existing medical condition or expect to spend a lot on healthcare in the upcoming year, pick a plan with more comprehensive coverage.
An HDHP is often only recommended for people who don’t expect to need healthcare coverage other than in the case of a serious medical emergency due to its qualities. You should carefully weigh your alternatives throughout the open enrollment period to decide which plan best meets your needs. 22
What Medical Costs Are Deductible?
Tax-deductible medical costs include inpatient hospital care, acupuncture treatments, enrollment in weight-loss programs, and payments to doctors, dentists, and surgeons, among other costs. The Internal Revenue Service lists specific cases of deductible medical costs on its website. Which medical expenses are not allowed as an income deduction?
Medical expenses including those for funerals and burials, non-prescription drugs, toothpaste, hygiene, and cosmetics, among other things, are not tax deductible.
Can You Deduct Medical Insurance Premiums From Your Taxes?
For the tax years 2022 and 2023, you can deduct any qualifying medical expenses you paid for yourself, your spouse, or your dependents as long as the amount exceeds 7.5% of your adjusted gross income (AGI). Additionally, self-employed individuals are still eligible to deduct premiums even if their AGI is below 7.5%. 5 What Constitutes A Qualified Medical Expense?
Examples of qualifying medical expenses that are frequently deductible on a yearly income tax return as medical expenses include doctor visits, lab tests, and hospital stays.
Are medical expenses deductible from my income?
It differs. You can only claim medical costs that total more than 7.5% of your adjusted gross income. Schedule A calculates the amount you are permitted to deduct (Form 1040).
The outcome
If you are a participant in an employee-sponsored plan, your premiums are generally already tax-advantaged. Yet, in a few certain circumstances, you might be able to claim a tax advantage when you buy your insurance policy.
You can deduct the cost of your health insurance premiums, for example, if your total healthcare costs exceed 7.5% of your adjusted gross income (AGI) or if you work for yourself.
5 If the amount exceeds your business income, you might not be able to deduct the full amount you paid for premiums in the latter scenario.