Is Health Insurance Tax Deductible?
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There are ways to make that health insurance premium tax deductible. And there are ways to scoop up tax credits on health insurance as well through HealthCare.gov. Let's take a look at all the ways you can save money on your taxes with your healthcare premiums.
Tax-Deductible Medical Expenses
When you itemize your deductions, medical expenses may be at the top of your list. Dental expenses count as well. And you may include medical expenses you pay for yourself, a spouse or a dependent such as a child.
But you can only make these medical deductions after they exceed 10 percent of your adjusted gross income. Let's say your adjusted gross income is $60,000 a year. Ten percent would be $6,000. So any qualifying expense exceeding $6,000 would be tax deductible.
And there are a lot of medical items that will qualify for tax deductions including ambulance services, acupuncture, contact lenses, chiropractor services, eye exam and glasses, dental treatments, crutches, hospital services lab fees and nursing services.
What about deducting health insurance premiums? It is tough for someone with a company health plan to qualify. The reason? Employers use pre-tax dollars when taking out employee money for employee health care premiums. Because of this, you won't be able to deduct your health insurance premiums. Still, itemizing your medical expenses can be a very good deal and one that families should embrace, as long as they are up to itemizing their deductions. IRS Publication 502 has all the details on Medical and Dental Expenses.
Tax Deductible Health Care Premiums for Self-Employed Workers
If you have income from self-employment, your health insurance premium can be tax deductible if you aren't eligible to participate in a health plan from an employer or your spouse's employer.
Self-employed people are allowed to deduct their health insurance premiums on Schedule 1 of the 1040 as an "above the line" deduction, which means it lowers adjusted gross income.
So be sure to take advantage of this simple, straightforward tax deduction. It will go a long way in reducing your taxable income.
Here's another plus to being self-employed, if you should itemize your expenses you will be able to make medical deductions after they exceed 7.5 percent of your adjusted gross income. You won't however be able to deduct your health insurance premium here if you've already taken an "above the line" tax deduction on your health insurance. So choose the one that works best for you. Most people find the most tax savings with the "above the line" tax deduction.
Tax Credits Through the HealthCare Marketplace
The tax credit is based on the income estimate and household information you put on your HealthCare Marketplace application. If your income falls between 100 percent and 400 percent of the federal poverty level for your household size, you qualify for a tax credit.
If you wish, you can use all or some of your tax credit in advance to lower your monthly health insurance premium. Be sure to keep track of how much of the tax credit that you take in advance. If you use more advance payments of the tax credit than you qualify for based on your final yearly income, you must repay the difference when you file your federal income tax return.
On the flipside, if you use less tax credit than you qualify for, you'll get that tax credit amount back when you file your taxes. In addition, if you buy health insurance through the HealthCare Marketplace then your premiums would be tax deductible as a medical expense. So you would want to gather up the information on all your medical and dental expenses, including your HealthCare Marketplace insurance premiums. You can start making medical deductions after the expenses exceed 10 percent of your gross adjusted income. So gather up all expenses for you, your spouse and your children. It will take a little bit of work. But tax savings await.
COBRA Insurance Is Tax-Deductible
The Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers who lose their health care benefits the right to choose to continue group health benefits for a limited period of time. Circumstances for COBRA include voluntary and involuntary job loss, a reduction in hours worked, a transition between jobs, a divorce and other life events.
COBRA is often more expensive than the amount that active employees are required to pay for health coverage. Since the employer usually pays part of the cost of an employee's plan and all of that cost now gets charged to the individual receiving COBRA. If you elect COBRA, the coverage must be identical to the coverage currently available under the plan for active employers. You are entitled to the same benefits, choices and services. Depending on the qualifying event for coverage, COBRA coverage is available for 18 to 36 months. As for taxes, the health insurance premiums for COBRA are tax deductible because they are paid by you on an after-tax basis. You can deduct the COBRA premium as an eligible medical expense on Schedule A as an itemized deduction.
Medicare Premiums Are Tax Deductible
Nearly 62 Americans are enrolled in Medicare and enrollees pay about 15 percent of the cost for Medicare with premiums they pay each month.
Health care premiums for Medicare, Part B, C and D and Medigap coverage are all tax deductible. Since 2012, the IRS has allowed self-employed individuals to deduct all Medicare premiums from their federal taxes. This includes Medicare Part B, Part A for people who pay a premium for it, Medigap, Medicare Advantage plans and Part D.
As mentioned earlier, this involves using Schedule 1 of the 1040 and taking an "above the line" deduction, lowering your adjusted gross income. Another option for self-employed seniors is to include your Medicare premiums as an itemized deduction on your Schedule A instead. Try both options and see what works best for you. Most might find the "above the line" the most financially beneficial. Even if you are not self-employed, you will be able to include your Medicare premiums as an itemized deduction on your Schedule A since your Medicare premiums count as medical expenses. So take the time to itemize your medical deductions, including Medicare premiums, and see what kind of tax savings arises.
Using Health Savings Accounts
A health savings account is a type of savings account that lets you set aside money on a pre-tax basis for qualified medical expenses. By using untaxed dollars in a health savings account to pay for deductibles, co-pays, co-insurance and other medical expenses, you may be able to lower your healthcare costs. But be aware that health savings account money may not be used to pay health insurance premiums. But you can use the money in a health savings account to pay for qualified medical expenses. And yes, you can open a health savings account (HSA) even if your employer doesn't offer one.
You may contribute to a health savings account if you have a high deductible health plan. A high deductible health plan is a plan that only covers preventative services before the deductible kicks in. For 2020, the minimum deductible for a high deductible health plan is $1,400 for an individual and $2,800 for a family.
For 2020, if you have a high deductible health plan, you can contribute up to $3,550 for self-only coverage and up to $7,100 for family coverage into a health savings account. The money in a health savings account rolls over year to year if you don't spend it. And your health savings account money may earn interest, which is not taxable. Withdrawals from your health savings account for qualified health care expenses are 100 percent tax-free, which is just another advantage to these accounts. If you're ready to start comparing health insurance rates in your area, enter your zip code to begin!