Several criteria determine whether or not you can deduct the expense of health insurance on your income tax returns. What you can claim will depend on whether you are a full-time employee, a self-employed person, or if you paid for your insurance with pre-tax or post-tax money. The decision to itemize vs. take the standard deduction may also have an impact. Find out who qualifies and how the procedure works for taking a deduction for health insurance premiums.
- When health insurance premiums are deducted from wages tax-free and without any of the restrictions associated with the itemized deduction, employees gain.
- The complexity and restrictions of itemizing are also removed when self-employed individuals deduct health insurance "above the line" on their Schedule 1.
- Other taxpayers can claim the cost of health insurance as an itemized deduction only if their combined medical and dental expenses exceed 7.5 percent of their adjusted gross income.
A deduction for medical expenses
- Expenses that qualify for the medical expense deduction include costs for health insurance. This deduction, which is only available to those who itemize, is available for expenses that total more than 7.5 percent of your adjusted gross income (AGI) for the tax year 2021, which corresponds to the return you file in 2022.
- This level was 7.5% until 2013, when it was raised to 10%. However, for taxpayers 65 years of age or over, it stayed at 7.5% for a brief period of time. Then, regardless of age, all taxpayers have to meet the 10% requirement as of December 31, 2016 in order to be eligible for this deduction.
- The 2017 Tax Revision (P.L. 115-97) reinstated the 7.5 percent threshold retroactively for 2017 and went forward until 2018.
- The 2019 and 2020 Taxpayer Certainty and Disaster Tax Relief Acts permanently extended the 7.5 percent threshold, preventing it from returning to 10 percent as planned in 2019.
Application of the Percentage Threshold
Unless you have large additional medical costs on top of your insurance payments, the 7.5 percent rule is often statistically unfavourable. To help you pass the 7.5 percent criterion, you can include them in the deduction.
For example, if your AGI was $60,000 and you paid $4,500 in health insurance premiums during the tax year, you would be unable to deduct those expenses in 2020 because 7.5 percent of your AGI equals $4,500.Nothing more than that sum was paid by you.
However, if you also paid an extra $3,000 in uninsured medical charges, your total expenditures would come to $7,500. Because this is $3,000 more than your 7.5 percent threshold, you can deduct the entire $3,000 as an itemized tax deduction.
Not All of Your Income Is Affected by the Threshold
The good news is that this percentage only applies to your AGI and not to your entire income. This figure is the result of subtracting certain above-the-line deductions from your gross income to determine your taxable income on Schedule 1 of your Form 1040 tax return.
A few retirement plan contributions, tuition, and student loan interest are examples of above-the-line deductions. If you are eligible for any of these deductions, your AGI will likely be lower than your gross income. For instance, even though you made $60,000, your AGI would only be $54,000 if you made $6,000 in IRA contributions that year. It would be $4,050 instead of $4,500 for your 7.5 percent threshold.
Before you claim any itemized deductions or the standard deduction for your filing status on line 12 of your Form 1040, your AGI is shown on line 11 of that document.
Pre-Tax Salary Deduction vs. Tax Deduction
Employees who pay for health insurance through payroll deductions using pre-tax money are ineligible to claim another deduction for the same cost.
If you're confused about how you're paying for insurance provided by your company, check your pay stubs. If the deductions are made before your employer determines your tax withholding on the remaining amount, you are using pre-tax money.
Paying for health insurance as a pre-tax salary deduction is actually more advantageous and will probably save you more money than taking the itemized deduction for medical costs.
Health benefits before taxes. You can lower your taxable income, and the percentages of that income that you must pay in income tax, Social Security tax, and Medicare tax are all based on that taxable income.
If you work for yourself,
Self-employed individuals can take a deduction for health insurance premiums they pay for themselves and their dependents directly on line 16 of the Schedule 1 form. Another above-the-line adjustment to income is being made here. You can then transfer the total of Part 2 of Schedule 1 to your tax return.
You don't have to itemize your deductions to take this deduction, which can lower your AGI by subtracting your gross income total. It is exempt from the 7.5 percent-of-AGI restriction.If you work for yourself, you can deduct up to 100% of the premiums you paid, but your deduction is limited to your net self-employment income.Any premiums over your net self-employment income, as well as any other out-of-pocket medical costs, may be deducted as an itemized deduction.
Questions and Answers (FAQs)
What kinds of expenses are deducted for medical expenses
Any medical or dental costs for you, your spouse, or your dependents may be written off by the IRS. These could include the cost of going to the doctor, purchasing glasses, traveling to necessary medical care, and the premiums you pay for health insurance.
How can you make health insurance premium deductions on your taxes
Schedule A of IRS Form 1040 is where medical expense deductions are made, including any deductions for insurance premiums.