Health insurance in Texas and across the United States is one of the most significant financial expenses for individuals and families. This leads many people to wonder if they can deduct some of their healthcare expenses from their taxable income.
If you’re enrolled in an employer-sponsored group health insurance plan and your premiums are paid through a payroll deduction, your premiums are probably already tax-free. Unfortunately, in this case, you won’t be able to use them as a year-end tax deduction.
But even in that case, you might still be able to claim a deduction if you have considerable healthcare costs. In addition, if you purchase your own health insurance and are self-employed, you might be able to claim the premiums as a deduction if you meet certain criteria.
Let’s talk about your tax-deductible healthcare expenses and how to determine if you’re eligible to deduct your premiums.
Premiums That Are Tax-Deductible
All health insurance premiums you pay out-of-pocket are tax-deductible. This would include premiums that include coverage for medical care like surgeries, hospitalizations, prescription drugs, outpatient services, dental care, prescription lenses, and long-term care. If you are responsible for these premiums for yourself, your spouse, and any dependents, you can deduct them when preparing your year-end taxes.
Premiums you pay for insurance through COBRA and policies purchased through a federal marketplace or state marketplace are also tax-deductible. Part B, Part C, and Part D Medicare premiums are tax-deductible, as are ones for Part A if you are not receiving it premium-free. (If you or your spouse has worked and paid Medicare taxes for at least 40 quarters, you qualify for premium-free Part A.) You may also deduct premiums you pay for a Medicare supplement (Medigap) plan.
If you are self-employed and purchase your own health insurance, you may also deduct this from your income, thereby reducing your adjusted gross income (AGI). You can also deduct qualified long-term care premiums and maybe even medical and dental expenses. You’ll need to itemize these deductions on Schedule A of IRS Form 1040.
To review, you can deduct the following premiums from your tax bill:
● Premiums for you, your spouse, and your dependents that you pay out-of-pocket
● Premiums for COBRA insurance
● Premiums for health insurance through federal or state marketplaces
● Premiums for Medicare Part B, Part C, and Part D
● Premiums for a Medicare supplement plan
● Premiums for health insurance and qualified long-term care if you are self-employed
You will only be able to deduct amounts that exceed 7.5% of your adjusted gross income, regardless of if you are self-employed, an independent contractor, or a W2 employee.
Premiums That Are Not Tax-Deductible
By now, you probably have a good idea of which of your health coverage premiums are deductible. Let’s quickly review premiums that are not tax-deductible.
You cannot deduct any of your health insurance premiums paid by your employer or any premiums taken from your paycheck pre-tax. If your health insurance premiums are automatically deducted from your paycheck, they do not qualify for a tax deduction.
If you are enrolled in Medicare Part A, and Social Security pays the premium (as it does for most Medicare beneficiaries), you cannot deduct that amount from your taxes.
Lastly, if you qualified for a tax subsidy or premium tax credits on an insurance plan you purchased through the federal or state insurance marketplace, those amounts do not qualify. You can only deduct the portion you pay from your taxes.
Health insurance premiums that are not tax-deductible include:
● Premiums paid by an employer
● Premiums withdrawn from your paycheck pre-tax
● Premiums for Medicare Part A that Social Security pays
● Premium tax credits or subsidies that apply to an Affordable Care Act plan purchased through a federal or state exchange.
Let’s look at some medical expenses outside of your premiums that you might be able to use as tax deductions.
Medical Expenses That Are Tax-Deductible
If you decide to itemize your tax deductions, you can also deduct qualified medical expenses for your family. The list of qualified expenses is lengthy, but we’ll mention some common costs here.
● Healthcare providers like nurse practitioners, chiropractors, doctors, psychiatrists, psychologists, and dentists.
● Inpatient hospitalizations
● Prescription medications and insulin
● Inpatient rehabilitation and treatment for drug and alcohol addiction
● Service animals necessary for individuals with physical disabilities
● Preventive and restorative dental treatment
● Weight-loss programs if a doctor diagnoses a disease, including obesity
● Tobacco cessation programs and prescription drugs for nicotine withdrawal
● All nursing home care, if the primary need is medical attention
● Some nursing home care, if the primary need is something other than medical care
● Prescription eyeglasses or contact lenses, reading glasses, hearing aids, wheelchairs, crutches
● Transportation to and from medical treatment that also qualifies as a medical expense (bus, taxi, ambulance, tolls, parking fees, personal car, train, etc.)
● Transportation and admission to a medical conference related to a chronic illness you, your spouse, or dependents have been diagnosed with
Medical Expenses That Are Not Tax-Deductible
If you are reimbursed for any medical expenses, you cannot use them as deductions. In addition, any medical treatment not directly related to your health is not deductible. This would include things like cosmetic procedures, including hair transplants. You also cannot deduct over-the-counter medications or general purchases like vitamins, diet food, toothpaste, etc.
Standard Deduction vs. Itemized Expenses
We’ve used the word “itemize” a few times now. But we haven’t discussed how itemizing is different than taking a standard deduction on your taxes. Both options will reduce your adjusted gross income, but you’ll need to determine which one will reduce it the most.
A standard deduction is a flat-dollar amount used to reduce your AGI. If you use this deduction, you do not need to itemize your expenses. It’s much easier to prepare your taxes with a standard deduction, but you might be able to benefit more by taking the time to itemize.
You should ask yourself two questions when deciding which type of deduction is best to use on your tax return.
First, are your total medical expenses more than 7.5% of your AGI? You’re only allowed to deduct the portion that exceeds 7.5%. For instance, if your AGI is $80,000 and your healthcare expenses were $20,000, those expenses accounted for 25% of your AGI. You may deduct $12,500 ($20,000 – $7,500).
Second, ask yourself if your itemized deductions are more than the standard deduction. In our example, let’s say you are a single individual. Looking at our table above, you can see that your standard deduction would be $12,950. If your total itemized deductions do not exceed that amount, you should use the standard deduction. In this case, unless you had other deductions, you would not itemize.
How to Reduce Your Taxable Income with an HSA
A Health Savings Account (HSA) is a great way to lower your taxable income. Anyone who enrolls in a high-deductible health plan is eligible to open an HSA. Some employers offer these accounts directly through their company, but if they don’t, you can choose any administrator for your HSA.
You can benefit from an HSA in several ways. First, your premiums for a high-deductible plan will be lower than other insurance premiums. Second, you’ll get to contribute funds to your HSA tax-free. You can use those funds to pay for qualified expenses, or you can invest them in whatever investment options are available within your HSA. Those investments will grow and can be spent tax-free.
Each year, there are limits on how much you can contribute to an HSA. Limits are set for either individuals or families and typically increase each year. Your employer can also deposit funds into your account if they include it as an employee benefit.
Are health insurance premiums tax-deductible?
As long as you are paying out-of-pocket for the premiums, they are tax-deductible. Premiums paid by your employer or taken from your paycheck pre-tax are not deductible.
What are qualified medical expenses?
Qualified medical expenses include any copays, coinsurance, or other out-of-pocket costs for medical care.
What medical expenses are not tax-deductible?
Any medical expenses that were reimbursed are not deductible. You also cannot deduct expenses not directly related to your underlying health, like those for cosmetic procedures.