Are My Health Insurance Premiums Tax-Deductible?

When tax time rolls around, you may be wondering if your health insurance premiums are tax-deductible. It depends on who you are and who you work for.

Self-employed

If you are self-employed, the answer often is yes—the premiums you pay to cover yourself and your dependents are probably tax-deductible, as long as you're obtaining your own health insurance and aren't eligible to participate in a health plan that's subsidized by your spouse's employer (or your own employer, if you have a job in addition to your self-employment).

This is true regardless of whether you get your insurance through the exchange, or in the individual market outside the exchange. Premium subsidies (premium tax credits) are available in the exchange, but not outside the exchange. Either way, self-employed individuals can only deduct the amount they actually pay in premiums. There's no "double-dipping" allowed, so if you receive a premium subsidy (ie, a premium tax credit) in the exchange to cover a portion of your premium, you can only deduct your after-subsidy premium on your tax return.

It's important to understand that the amount of premium subsidy you receive is related to your modified adjusted gross income (an ACA-specific calculation, which differs from normal modified adjusted gross income), but the premiums you pay for health insurance as a self-employed person are a factor in determining your modified adjusted gross income. This ends up being a circular problem: Your premium subsidy depends on your adjusted income, but your adjusted income depends on your premium subsidy. But the IRS has addressed this issue, and your tax adviser or tax software can help you sort it out.

But even if you're self-employed, if you, your spouse, or your dependents are covered by an employer's group health insurance plan (either your own, from a separate job, or your spouse's or parent's plan), the premiums you pay for that coverage are probably not something you can deduct on your tax return. That's because they're most likely already being paid with pre-tax dollars since employer-sponsored health insurance is tax-deductible for both employers and employees. And the IRS clarifies in Publication 535 that even if you buy your own health insurance and are self-employed, you can't deduct the premiums if you're eligible to have coverage that's subsidized by an employer, including your own or your spouse's.

Health Savings Accounts

If you have an HSA-qualified high deductible health plan (HDHP), you may have a health savings account (HSA). Your HSA may be established through your employer, or it may be something that you set up on your own, as you can have an HDHP offered by an employer or purchased in the individual market.

The contribution you make to your HSA is 100 percent tax deductible up to a limit of $6,900 for family coverage and $3,450 for individual coverage in 2018 (these amounts are increasing to $7,000 and $3,500 in 2019). Contributions to your HSA can be made by you or by your employer, but only the portion you contribute yourself is tax deductible. If you fund your HSA through payroll deduction, the contributions will be made on a pre-tax basis, and that will be reflected in the W-2 you receive (ie, you won't have to deduct them on your tax return, as they will have already been deducted from your taxable income). But if you fund your own HSA, you'll keep track of the contributions you make during the year and deduct the total on your tax return.

The premiums that you pay for your HDHP can also be deducted, just like any other health insurance premium, if you're self-employed. Or, as described in the next section, as part of your overall medical expenses. And if you obtain your HDHP via your employer, the premiums are most likely already being paid on a pre-tax basis.

Premiums as part of overall medical expenses

Even if you are not self-employed, the Internal Revenue Service (IRS) allows you to count medical and dental insurance premiums (and with some limitations, long-term care insurance premiums) as part of the 7.5 percent of your adjusted gross income (AGI) that has to be spent on health care before any out-of-pocket medical expenses can be deducted. This threshold is increasing to 10 percent starting in 2019.

A long list of health-related expenses can be included in your total medical expenses, including prescription medications and optional surgical procedures, like laser eye surgery to correct vision. The IRS has a list on its website. Keep track of the out-of-pocket expenses you incur during the year - including health insurance premiums if you're buying your own plan but are not self-employed. If your total costs exceed 7.5 percent of your AGI (10 percent starting in 2019), you'll be able to deduct the costs above that threshold.

So for example, if your AGI is $50,000 and you spend $8,000 on medical costs, including health insurance premiums that you pay yourself, you'd be able to deduct $4,250 worth of medical expenses on your tax return (7.5 percent of $50,000 is $3,750, so you'd be able to deduct the amount in excess of $3,750 in this scenario).

Note that the 7.5 percent threshold used to be the standard, but the ACA increased it to 10 percent (it remained at 7.5 percent for people age 65 and older, through the end of 2016). However, the GOP tax bill (the Tax Cuts and Jobs Act) that was enacted in December 2017 reset the threshold to 7.5 percent for all tax filers, for 2017 and 2018. So instead of having to spend more than 10 percent of your income on medical costs (including premiums) in order to qualify for a deduction in 2017 and 2018, you only had to spend more than 7.5 percent. This expires at the end of 2018, however, and will revert to 10 percent for all tax filers. Starting in 2019, only medical expenses that exceed 10 percent of income will be eligible for the deduction.

In order to deduct medical expenses, you have to itemize your deductions. This is in contrast to the two scenarios described above—the self-employed health insurance premium deduction and the Health Savings Account deduction—both of which can be utilized regardless of whether you itemize deductions.

This is just an overview of how the IRS treats health insurance premiums. If you have questions about your specific situation, but sure to speak with a tax advisor.

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