When it comes to reducing the taxes you owe, there are three main tools at your disposal: deductions, exemptions and credits. Determining whether health care premiums are tax deductible depends on various factors – for instance, how you get coverage, whether or not itemize deductions and how much is spent annually on medical expenses.
Most Americans purchase employer-sponsored health insurance via payroll deduction plans, where premiums are deducted pre-tax and not counted toward your taxable income on your W2. If you opt into an HRA plan, any money set aside to pay for healthcare is also tax-free. Self-employed individuals can generally deduct the costs of healthcare premiums paid on behalf of themselves and dependents as long as itemizing their deductions; this includes short-term insurance premiums as well as qualified long-term care premiums; small business owners can write off any related costs that arise for employees as long as itemizing deductions is itemized – thus saving time when filing their tax returns!
The IRS offers thorough guidelines on how to calculate whether or not health insurance premiums qualify as tax deductions. In general, if your health expenses account for more than 7.5% of your adjusted gross income (AGI), then deducting them can be advantageous; however if paying COBRA coverage after leaving an employer or purchasing insurance through individual marketplace may prevent claiming these costs as tax breaks since these premiums aren’t being covered by an employer subsidized plan.
If you receive premium subsidy through the marketplace, you won’t be eligible to claim health insurance premiums as deductions due to effectively double claiming it through both taxation and the premium tax credit on your return – the IRS provides more details in Publication 535.
Assuming you’re retired, Medicare A and B premiums paid directly by Social Security won’t be subject to taxation. Assuming you use your premium savings account solely for Medicare Part D premium payments, these amounts should not be taxed as income. If you itemize your deductions and are self-employed, dental or long-term care insurance premiums paid on behalf of yourself and dependents can also be deducted as tax expenses. You may also deduct short-term insurance premiums if you’re self-employed and your medical expenses exceed 7.5% of AGI. To do this, file IRS Form 1040 with Schedule A to report this value as an adjustment to gross income. Contrast this with the standard deduction available to everyone on Schedule A, which doesn’t require you to itemize deductions. For more information, consult with either a certified public accountant or the IRS website; additionally, consulting a financial planner may help navigate healthcare premiums and deductions more smoothly.