Are my premiums tax deductible?

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As tax season approaches, you may wonder if your health insurance premiums are tax deductible. Answer? Maybe depending on a number of factors, including how you get coverage, whether you are self-employed, and how much you spend on medical expenses, including health insurance premiums.

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Employer-sponsored health insurance

Most Americans under the age of 65 obtain health insurance from their employer. Employers pay part of the insurance premiums (in most cases, most of them ), and the rest is paid by the employees. And in almost all cases, the premiums people pay for employer-sponsored insurance coverage are deducted from wages before taxes.

Because double dipping is not allowed, you cannot deduct health insurance premiums from your tax return if they have already been paid in cash before tax for the year (that is, deducted from your paycheck before it is due. calculate tax deductions). … Because most non-retired Americans pay their health insurance contributions in pre-tax dollars for one year, they also don't take tax deductions on those contributions when they file their tax returns.

But for people who buy their own health insurance, things are a bit more complicated.

Free-lancers

If you are self-employed, the health insurance premiums you pay to cover yourself and your dependents are probably not taxable if you obtain your own health insurance and are not eligible to participate in an employer-subsidized health insurance plan from your spouse (or your own employer if you have a job other than self-employment).

This is true whether you obtain insurance through a stock market in your state or a separate market outside of the stock market. Premium subsidies (premium tax credits) are available on the stock market , but not off the stock market.

In any case, freelancers can only deduct the amount they actually pay in the form of insurance premiums. As always, double dipping is not allowed, so if you receive a premium subsidy (i.e. tax credit) in exchange for covering a portion of your premium, you can only deduct the premium after the subsidy from your tax. Return.

It is important to understand that the amount of insurance premium you receive depends on your modified adjusted gross income ( ACA specific calculation, which differs from modified normal adjusted gross income), but the premiums you pay for health insurance as a self-employed person . people are a factor in determining your modified adjusted gross income. Ultimately, this becomes a vicious cycle problem: Your premium subsidy depends on your adjusted income, but your adjusted income depends on your premium subsidy. The IRS has resolved this problem , and your tax advisor or your tax program can help you fix the problem.

Even if you are self-employed, if you, your spouse, or your dependents are covered by your employer's group health plan (either yours, a separate job, or your spouse or parent's plan), the premiums you pay for that coverage it will probably not be deducted from your tax return. This is because they are most likely already paid in pre-tax dollars, as 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 cannot deduct premiums if you are eligible for employer-subsidized coverage, including your own or your spouse's. This is true even if you waived this coverage and bought your own plan.

Medical savings accounts

If you have an HSA- qualified High Deductible Health Plan (HDHP) , you can fund your Health Savings Account (HSA). Your HSA can be established through your employer, or it can be something you customize, as you can get the HDHP offered by the employer or purchased in a separate marketplace .

The contribution you make to your HSA is 100% tax deductible up to the 2021 limit of $ 3,600 if your HDHP only covers you, or $ 7,200 if it also covers at least one additional family member.

You or your employer can make contributions to the HSA, but only the part that you contribute yourself is not taxable. If you fund your HSA with payroll deductions, the contributions will be paid before tax and this will be reflected on the W-2 form you received (that is, you will not have to deduct them from your tax return as they will already be deducted from your taxable income , similar to how employer-sponsored health insurance premiums are almost always paid in cash before taxes).

But if you fund your own HSA, you will keep track of the contributions you make during the year and deduct the total from your tax return (your HSA administrator will also track the amount and report it to you and the IRS via Form 5498-SA ).

The premiums you pay for HDHP can also be deducted like any other health insurance premium if you are self-employed. Or, as described in the next section, as part of your general medical expenses, if you list your deductions and your medical expenses are high enough to qualify for the deduction.

If you get HDHP through your employer, your premiums are likely already paid before taxes. In this case, as with any other type of health insurance, you cannot deduct your premiums from your tax return because the money you used to pay them was not originally taxed. So if you're registered with HDHP through your employer and contributing to your HSA through payroll deductions (that's how it works for most people), you probably won't deduct any of them on your tax return, as bonuses and contributions are likely to be deducted. of your paycheck before taxes.

Insurance premiums as part of general medical expenses.

Even if you are not self-employed, the IRS allows you to count medical and dental premiums (and, with some restrictions, long-term care premiums) as part of the 7.5% adjusted gross income (AGI) that must be spent on care medical. before your out-of-pocket medical expenses are deducted.

The deduction threshold for medical expenses was briefly set at 10%, instead of 7.5%, from 2013 to 2016. But Congress has lowered that threshold to 7.5% as of 2017, and the Consolidated Allowances Act 2021 establishes it as a permanent threshold. …

Your general medical expenses can include a long list of health-related expenses, including prescription drugs and additional surgical procedures, such as laser eye surgery to correct vision. The IRS has a list on its website.

Keep track of your own expenses throughout the year, including health insurance premiums, if you buy your own plan but are not self-employed (and therefore cannot use health insurance deductions for self-employment). If your total costs exceed 7.5% of your AGI, you will be able to deduct costs that exceed this threshold, as long as you choose to itemize your deductions, more on that in a moment.

So, for example, if your adjusted gross income is $ 50,000 in 2021 and you spend $ 8,000 on medical expenses, including self-pay health insurance premiums and you are not eligible for the deduction, you may be able to deduct medical expenses. in the amount of $ 4250 for your expenses. tax return (7.5% of $ 50,000 is $ 3,750, so in this scenario you could deduct more than $ 3,750, resulting in $ 4,250).

But to deduct medical expenses, you must itemize your deductions. This is in contrast to the two scenarios described above: deducting health insurance premiums on your own and deducting from health savings account, both of which can be used regardless of whether deductions are accounted for.

The Tax Cuts and Employment Act, passed in late 2017, substantially increased the standard deduction, making the standard deduction the best option for most taxpayers . To benefit from a breakdown of deductions by item, you will need many expenses that can be broken down by item. Depending on your medical and other itemized expenses, you may be able to move on this way. And you should definitely keep track of your medical expenses throughout the year so that you can figure it out when paying taxes. But keep in mind that with the new standard deduction amounts, you are now much less likely to end up listing your deductions, including medical expenses.

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

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Photo © peanut8481 / istockphoto.com

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