Paying for health insurance is a significant expense for many Americans. With premiums continuing to rise year after year, you may be wondering if you can deduct your medical insurance costs to lower your tax bill.
The short answer is – it depends.
Whether your health insurance premium is tax deductible will vary based on factors like:
- How you get your insurance coverage (employer-sponsored, marketplace, Medicare, etc.)
- Your employment status (self-employed, W-2 employee, retired, etc.)
- Which expenses qualify as “medical care”
- If you itemize deductions or take the standard deduction
While most Americans cannot deduct their share of employer-sponsored premiums, other scenarios allow for deducting medical insurance costs.
Let’s break down when you can and cannot deduct health insurance on your taxes.
When Health Insurance Premiums Are Tax Deductible
You may qualify to deduct private health insurance premiums as a medical expense in certain situations:
Self-Employed Filers
If you are self-employed, the IRS allows you to deduct health insurance premiums covering yourself, your spouse, dependents, and children under 27 as an adjustment to gross income (Line 16 of Form 1040).
This applies whether you purchased insurance through your state’s Affordable Care Act (ACA) marketplace or directly from an insurance provider. It also covers premiums for dental, vision, Medicare, and qualifying long-term care insurance.
The self-employed health insurance deduction is not subject to the 7.5% AGI threshold that applies to itemized medical expenses for non-self-employed filers. However, your deduction cannot exceed the net earnings from your business.
If you received premium subsidies (premium tax credits) through the ACA marketplace, you can only deduct the portion of premiums you paid out-of-pocket.
Itemized Medical Expenses
Taxpayers who itemize deductions can treat health insurance premiums as deductible medical expenses on Schedule A, along with other out-of-pocket medical costs like:
- Co-pays
- Deductibles
- Dental expenses
- Prescriptions
- Medical equipment
These expenses must total over 7.5% of your adjusted gross income (AGI) to qualify for deduction. Only the amount exceeding the 7.5% threshold can be deducted.
So if your AGI is $50,000, your total medical expenses would need to surpass $3,750 ($50,000 x 0.075) before you could deduct the excess amount.
Itemized health insurance deductions cover premiums for:
- Employer-sponsored plans if paid with after-tax dollars
- COBRA
- Individual and family plans
- Medicare Parts B & D
- Long-term care insurance up to IRS limits
If you received ACA premium tax credits, you can only deduct the portion of premiums paid out-of-pocket after subsidies.
When Health Insurance Is NOT Tax Deductible
You cannot deduct health insurance premiums paid in the following scenarios:
Employer-Sponsored Insurance
If you receive job-based medical insurance, premiums are typically deducted pre-tax from your paychecks.
Since you already saved on taxes for these premium payments, you cannot deduct employer plan costs again on your tax return. This includes premiums for:
- Group health plans
- Retiree health plans
- COBRA (in most cases)
Exceptions may apply if you paid a portion of employer plan premiums using after-tax dollars. Retirees, for example, sometimes overlook deductible premium amounts paid from pension payouts or other non pre-tax income.
If you qualify for an employer’s wellness program discounts by meeting health targets, this also reduces your taxable income.
Pre-Tax Accounts
You cannot deduct premiums paid from pre-tax health accounts like:
- Health savings accounts (HSAs)
- Health reimbursement arrangements (HRAs)
- Healthcare flexible spending accounts (FSAs)
Since contributions to these accounts are already tax-advantaged, the IRS prohibits double-dipping on deductions.
Standard Deduction Filers
You can only deduct medical expenses, including health insurance, if you itemize deductions on Schedule A.
If you claim the standard deduction when filing, health insurance premiums cannot be deducted.
The standard deduction amounts for 2023 returns are:
- $13,850 for single filers
- $27,700 for married joint filers
- $20,800 for heads of households
Over 90% of taxpayers are expected to take the standard deduction, which means most people cannot deduct health insurance costs.
However, if your total itemized deductions exceed your standard deduction, filing Schedule A to deduct medical expenses may make financial sense.
Other Rules and Exceptions
A few additional notes about deducting health insurance premiums:
- If you qualify for ACA premium tax credits (subsidies), you can only deduct the portion of premiums you paid out-of-pocket. You cannot deduct the subsidized amount.
- Premiums for short-term limited duration health plans may count as deductible medical expenses. However, subsidies and tax credits do not apply to these non-ACA-compliant plans.
- For business owners, premiums paid to cover employees qualify as deductible business expenses, not personal medical expense deductions.
- If you receive Social Security retirement benefits, Medicare Part A premiums cannot be deducted from your taxable income since they are automatically paid from your Social Security payments.
- Long-term care insurance premium deductions have annual limits based on your age. Qualified policies must meet certain federal standards.
- Medical deductions can directly lower state income taxes in certain states even if you don’t itemize federally.
Should You Take the Health Insurance Deduction?
Wondering if claiming deductible health insurance premiums makes sense for your tax situation?
As a rule of thumb, take the action that lowers your taxable income the most. For medical expenses, make sure total deductible costs exceed 7.5% of AGI.
The IRS provides a tool to estimate deductible medical expenses, including premiums.
You can also use Schedule A to tally medical costs and compare total itemized deductions against your standard deduction.
If you have questions about qualifying expenses or how to handle deductions for your specific circumstances, consider consulting a tax professional.
The Bottom Line
Health insurance premiums can potentially be deducted from your taxable income, but several factors determine eligibility.
Most taxpayers cannot deduct employer-sponsored plan premiums since contributions happen pre-tax. However, self-employed individuals can deduct policy costs as an adjustment on Form 1040.
If you itemize, medical premiums can count along with other out-of-pocket expenses exceeding 7.5% of AGI. Just make sure total itemized deductions surpass your standard deduction.
Understanding the rules around deducting health insurance allows you to maximize savings and tax breaks. With premiums continuously rising, every bit of financial relief helps.