Health insurance premiums are often a significant expense for Americans. As premiums continue to rise, many seek to offset the expense through federal tax breaks. People often believe health insurance premiums are tax-deductible, especially if they itemize taxes or are self-employed. In some cases, health plan premiums can be deductible.
However, the real answer depends on several variables. Read on to learn who is eligible to take this deduction, what qualifying medical expenses can be deducted, and other tips for maximizing your tax deductions.
Who Is Eligible to Deduct Health Insurance Premiums
The number of taxpayers who qualify to deduct health insurance premiums is limited, but the option does exist for some. If you pay for health coverage on your own using after-tax dollars, you may be eligible to deduct. Other factors to keep in mind about qualifying to deduct your health insurance premiums include the following:
- The premiums must not be paid for by an employer. If your premiums are deducted from your paycheck using pre-tax dollars, you would not be eligible to deduct them from your taxes.
- The premiums must not be paid for using pre-tax dollars. This occurs when the premiums are taken from your gross pay before taxes are deducted.
- You cannot claim a subsidy. Health care is available to all Americans through the Affordable Care Act (ACA), including individuals, families, and small businesses. Income-based subsidies are offered through the platform to help offset health insurance costs. If you are claiming a subsidy to offset out-of-pocket expenses, the subsidized amount may not be deducted.
- The premiums plus medical expenses must exceed 10% of the taxpayer’s adjusted gross income (AGI). The AGI is the final taxable income for that tax year after all deductions. For example, if your income was $50,000 for the year, you would have eligibility to deduct anything past that 10% marker of $5,000 based on your income. If your medical insurance premiums and expenses totaled $10,000, the other $5,000 would be deductible from your taxable income.
Medical Expenses You Can Deduct
All taxpayers must decide to file itemized or standard deductions. If you are unsure which approach is best for you, you can add up your itemized total and compare it to the standard deduction amount. If the fixed-rate amount associated with the standard deduction exceeds your itemized total, you will save more on taxes using the standard deduction. Deducting any medical expense only applies to those filing itemized deductions.
Outside of health insurance premiums, numerous medical expenses may be tax-deductible. The IRS defines medical expenses as "payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body."
Here are some health care costs that may be included:
- Artificial limbs
- Dental expenses
- Hearing aid
- Home renovations (needed due to a medical condition)
- Hospital inpatient care
- Inpatient alcohol and drug treatment center fees
- Laboratory fees (such as blood tests)
- Medical equipment (such as crutches or wheelchairs)
- Neurologist visits
- Long-term care insurance
- Payments for transportation to essential medical care (including actual fare for a taxi, bus, train, or ambulance; personal car travel and associated out-of-pocket expenses like gas, tolls, and parking)
- Prescription medications
- Preventative care
- Psychiatric and psychology care
- Service animals to assist a visually impaired or hearing disabled person
- Vision care (including checkups, contacts, and glasses)
- Weight loss programs (related to disease and diagnosed by a physician)
Medical Deductions for the Self-Employed
If you are self-employed and have a net profit for the year, you can claim a health insurance premium tax deduction, whether you purchased the plan personally or through your small business. You are also able to include the deductions for your spouse and children. Some additional exceptions and restrictions are made for medical tax deductions for the self-employed.
- The 10% rule doesn’t apply to the self-employed, which gives you the ability to deduct all your premium payments.
- If you have another job that offers you the ability to participate in a plan, and you elect not to, you don’t qualify to take this deduction.
- You may be self-employed but disqualified from this type of deduction if you are offered health insurance coverage through a spouse’s employer and elect not to take it.
- A limitation to keep in mind is that as a self-employed person, you cannot deduct more than the amount of income you generate from your business.
- If you operate more than one business, you can only designate one of them as the health insurance plan sponsor. You can’t add up the income from multiple businesses to include in a deduction, so it’s usually in your best interest to pick the business with the most income to capitalize on your potential deductions.
How to Maximize Your Tax Deductions
Realizing you left money on the table around tax time can be a painful reality. To make the most of your medical expenses on your tax bill, here are a few tips to maximize your tax deductions.
Carefully Consider Your Filing Status
The majority of married couples file as "married filing jointly." However, this may not always be in your best interest. You can consider "married filing separately" as an alternative. One example of this being beneficial is when a spouse acquires a large number of medical expenses and calculating individual taxes may allow for a larger deduction.
Claim All Available Deductions
Numerous deduction options exist, so being sure to lay claim to all applicable ones can make a big difference in your taxes. Common deductions include medical costs, charitable donations, business expenses, and prepaid interest on mortgages. Some lesser-known tax deductions you may want to check if you qualify for include the following:
- Student loan interest
- Child and dependent care
- State income tax paid on the previous year’s returns
- Charity miles (miles driven to do charity or volunteer work)
- Medical miles (miles driven for medical reasons)
Maximize the Use of Contribution Accounts
If you have a health savings account (HSA), an individual retirement account (IRA), or a 529 account, you should keep in mind all your potential contributions. Plan for the year and consider how much you can contribute to each of these plans so that you don’t leave money on the table.
If you have not yet opened a traditional IRA but plan to, note that you can make contributions until the tax deadline. For example, a contribution can be made to your IRA until the filing deadline of April 15, 2021.
Take Advantage of Timing
Keeping an eye on the calendar can present other opportunities to maximize your returns. Here are a few examples:
- If you are self-employed, consider buying any needed office equipment and software before the end of the year to boost your refund.
- For mortgage payments, if you can make January’s payment by Dec. 31, this can be included in your mortgage interest deduction.
- If you have any medical treatments or exams needed, try to squeeze them in during the last quarter of the year so that you can include them in your medical expense deductions.
- Fit in some holiday charitable contributions before year-end, if possible, to include in that category’s deductions.
Be Mindful of Tax Credits
Tax credits can often work better than deductions to boost your refund. One example is the Earned Income Tax Credit (EITC). This can be claimed even if you are single and don’t have children and can also apply to the self-employed.
However, you must be between the ages of 25 and 65, and all filers and qualifying dependents must have a Social Security number. While this is typically thought of for low-income filers, it’s recommended that all filers explore this option. For example, in 2020, a married couple with three children with an adjusted gross income of $56,844 or less is eligible to receive up to a $6,600 reimbursement.
If you have children, though, you are eligible for a much larger credit through the EITC. You can also claim the Child and Dependent Care Credit, which doesn’t have limitations based on income.
Meet the Tax Filing Deadlines to Avoid Penalties and Fees
Filing your taxes by the appropriate deadlines will ensure you don’t get dinged with late fees and penalties. Even when filing an extension, if money is owed, you will still owe interest on any taxes due.
Manage Your Tax Forms and Accounting With Skynova
With an employer-sponsored plan, your premiums are probably already tax-advantaged. If you are self-employed, your health insurance premiums may be tax-deductible with certain limitations. Taking the time to carefully consider all your tax return options and determine whether your health insurance premiums are tax-deductible can make a difference in boosting your tax returns.
If you are self-employed or a small business owner, stay organized with Skynova’s business software and free templates. Our invoice template can also help you stay on track, get paid faster, and simplify your life. Explore our array of free resources today.