As people are getting prepared for annual tax return filing, one important question often lingers in their mind: are health insurance premiums tax deductible? The answer for this question is not a simple yes or no. The health insurance premiums that you pay every month may or may not be eligible for tax deduction. This eligibility is tied to the regulation enacted by the IRS. Although many people are often confused about this regulation, it is actually fairly easy to understand. You need to know the basic problem this question carries: in what situation health insurance premiums are tax deductible and in what situation they are not. You also need to know what qualifies you for medical expense deduction.
When Are Health Insurance Premiums Tax Deductible?
Health insurance premiums may be tax deductible if you pay them out of your own pocket. If you are self-employed, your health insurance payments are often fully deductible. Other healthcare-related expenses, including payments for medications and medical services as well as copays, may also be deductible. Even any payments that you have to make after your health insurance policy has paid the healthcare service provider may also be deductible. This rule applies not only to individual health insurance plan, but also family plan. As long as you pay all of the costs out of your own pocket, then the money that you spend is deductible. In brief, any after-tax payments that come from your own pocket are very likely to be deductible.
When Are Health Insurance Premiums Not Tax Deductible?
Health insurance premiums will least likely be tax deductible if you don’t pay them using your own money or if you pay them using pre-tax money. Here are some scenarios in which this situation may occur.
- If you are an employee whose health insurance premiums are paid by your employer or the government, you cannot claim tax deduction for the payment.
- If your employer pays a portion of your health insurance premiums, you cannot claim tax deduction for the portion your employer pays. If another portion of the premiums is paid using your paycheck pre-tax, that portion is also not tax deductible as it is already tax-free. You can only deduct the portion of premiums that is paid using your paycheck after-tax. You can consult your employer or HR officer to learn more about the tax status of the paycheck that is used to pay your portion of the premiums.
- If you receive subsidy because you buy your health insurance plan from insurance marketplaces that are run by either state or federal government, you cannot claim tax deduction for the subsidy. Again, you can only deduct the portion of premiums that you pay from your own pocket.
We have mentioned above that any payments for medical services and medications are deductible; however, they are deductible only if you pay them using your own money and thus are no longer deductible if they are paid by your insurer. We will disclose all types of medical expense that are and are not deductible in the following sections.
Medical Expenses that Are Deductible
If you instead of your insurer pay for the following medical expenses, they are most likely to be deductible.
- Medical services and medications
If you pay for your medical services and medications using your own money, the expenses are deductible.
- Medical equipment and facilities.
If your doctor requires you to use wheelchair and to build a ramp at home, you can mostly deduct the expenses.
- Travel expenses
Although these expenses are often overlooked when assessing your tax deduction, they are actually tax deductible.
- The cost of drug and alcohol abuse treatment
If you want to escape from alcohol or drug addiction, the expenses that you pay can be counted on Schedule A.
- The cost of stop-smoking program
If you intend to stop your smoking habit by joining a stop-smoking program, which costs you certain amount of money, the expense is likely to be deductible.
- The cost for attending medically necessary medical conference
If a medical conference in some distant place can provide you with solution for overcoming your chronic illness, your transportation and lodging expenses might be deductible.
- The cost of purchasing and installing medically necessary home appliances.
If you suffer from allergies and your doctor requires you to install a humidifier to your home’s HVAC system, the purchasing and installation cost of the humidifier might be deductible.
- The cost of medically necessary weight-loss program
If your obesity and cardiovascular disease require you—according to your doctor’s recommendation—to follow a weight-loss program, any related expenses might be deductible.
Medical Expenses that Are Not Deductible
Some of expenses that are mentioned above, if they are not medically necessary, are not deductible. Weight-loss program, for example, is not tax deductible if it is done to enhance your appearance. Other medical expenses that are not deductible include cosmetic treatments, funeral expenses, and cost of childcare for healthy baby. You can refer to IRS’s Publication 502 to learn more about all medical expenses that are and are not tax deductible.
Limitation Regarding Tax Deduction for Health Insurance and Medical Expenses
Just because you pay your health insurance premiums and other medical expenses using your own money doesn’t mean that your entire expenses are deductible. The government has affirmed that your expenses will be tax deductible only if they exceed 10% of your adjusted gross income. Adjusted gross income is calculated by adding all incomes that you get from your wages and investments, among others, and then subtracting them with certain business-related expenses, college tuition, alimony, and many others. For example, if the adjusted gross income of you and your spouse is $150,000 and you spend $20,000 to pay for medical expenses that are qualified for tax deduction, only $5,000 of that amount is tax deductible. This number is acquired by subtracting 10% of your adjusted gross income ($15,000) from your total medical expenses ($20,000). If you and your spouse are 65-years old or older, the threshold is 7.5% instead of 10%.
The tax deduction status of your health insurance premiums and medical expenses depend on various conditions. So, are health insurance premiums tax deductible? If you can understand those conditions, it should not be difficult for you to answer that question.