Is Health Insurance Tax Deductible?

April 4, 2011 No Comments »

taxes

Insurance Q&A: “Is health insurance tax deductible?”

In some instances, yes, health insurance premiums and additional costs can be deducted from your overall tax bill. There are a few different situations where this can happen.

Unfortunately, most of us who are enrolled in an employer sponsored program are largely out luck.


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However, some employees may be able to catch some tax breaks depending how they pay for their health insurance, as you will see below.

Keep in mind we’re talking about federal tax returns.

Here is a basic breakdown and description of the benefits you can expect to write-off (including premiums, deductibles and other out-of-pocket expenses):

Self Employed Individuals: This one is a biggie. You may be able to expense every dime of your health insurance premiums if you are self-employed. Additionally, you might even get to deduct additional expenses above regular monthly premiums.

The catch here is that you have to show a positive income for the year. Why, you ask? In order to keep everyone in the U.S. from starting a fake business to get the deduction. Everyone would have their own “business” of doing “whatever they could think of” to take advantage of the credit.

Additionally, you cannot take a deduction for any month of the year in which you were eligible for a subsidized health insurance plan via an employer. So if you worked for a company, and then quit and started your own business, only those latter months where you were self-employed would be eligible for a tax deduction.

Health Savings Accounts (HSA’s): This is where W-2 employees can score some tax breaks. Money paid into HSA’s is pre-tax. Also, the money your employer (may) contribute is not counted as “income” for tax purposes. This doesn’t mean you deduct the money your employer pitches in…it just isn’t counted as income (meaning you score without having to do anything “tax wise”).

Private Health Insurance: This is for individuals who have the opportunity to opt into an employer sponsored program, but don’t. Likely you are in this category because your company plan doesn’t offer good enough coverage or makes you pay too much for what they offer. Many small companies run into this situation.

In short, if your private health insurance costs exceed 7.5% of your adjusted gross income, you can get the tax break…it’s not automatic.

Relatives: Health insurance tax deductions are also available for individuals who pay premiums and other expenses for family members. Not your 5th cousin removed…but legitimate, immediate family members, such as children, grandchildren, in-laws’ nieces and nephews, and even foster and adopted children.

You won’t be able to deduct a single prescription you paid for last year though. You will have to prove you paid at least half of the family member’s healthcare costs for the year in question.

Consult the IRS website for more information and always be sure to consult with your tax preparer to ensure you make the proper deductions.

Tip: You should contact a local independent insurance agent to obtain private health insurance quotes even if you have the option through an employer sponsored program.

Taking the easy way out often leads to overpaying for what could be affordable health insurance coverage. And not having health insurance isn’t recommended (why do I need health insurance?).

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