Are Health Care Insurance Premiums Tax Deductible?

Most non-retired people do not qualify to deduct health care premiums as tax deductible expenses, since most pay their premiums with pre-tax dollars deducted from their paychecks throughout the year. So when they file their taxes, people who paid premiums with pre-tax dollars cannot claim them as tax deductions; although they can count these expenses as out-of-pocket medical costs. But this does not apply to people who purchase health insurance independently – they can either take advantage of premium tax credit to offset part of their monthly premium expense with pre-tax dollars upfront, or buy coverage off exchange and deduct any remaining premium payments on their taxes.

As a general guideline, the IRS only permits you to deduct health insurance premiums when they exceed 7.5% of your adjusted gross income. To help calculate which expenses qualify for this deduction, they have an online calculator. In addition to health insurance premiums and travel expenses related to medical treatment, long-term care premiums and related travel costs may also qualify for deduction.

As an employee, your health insurance premium deduction depends on whether or not you itemize deductions; employees can only deduct medical expenses if they exceed 7.5% of AGI. Conversely, self-employed taxpayers can deduct 100% of their health insurance premiums as an above-the-line deduction on their federal income tax returns, according to Claire Hunsaker of AskFlossie’s online financial community and group health plan provider enrolment restrictions (ie you must not have been employed all year).

An important consideration in selecting your plan on an exchange in your state is qualifying for a premium subsidy, more commonly referred to as an advance premium tax credit. Under the Affordable Care Act (ACA), only part of your premium must be covered with this credit; any remaining unsubsidized premium can only be deducted on taxes. However, the rules vary slightly when purchasing coverage off-exchange instead.

If you need assistance choosing which option is the right one for you, consult a tax professional. They will help calculate your AGI and compare it against both standard deduction and itemized deductions to see which works better in your situation. They can also explain any tax rules which might pertain to you specifically. As the Affordable Care Act provides multiple choices for individuals looking for health coverage at an affordable cost, it’s crucial to be aware of how each choice could impact taxes so by consulting an expert you can avoid surprises at tax time.

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