A widely asked question is whether insurance premium is tax deductible. This discussion will take a special reference to the health sector. With tax season underway and Obamacare still just a few years old, a big question many have is: Are health insurance premiums tax deductible?
Under some scenarios, they are. Under others, they are not. And there are, of course, exceptions and limitations. Read on for some basics.
Health insurance premiums that are NOT tax deductible
You cannot take a tax deduction for health insurance unless you paid for it. If your employer or the government pays your health insurance premiums, premiums are not deductible. If your employer pays part of your health insurance premiums and you pay the other part, you cannot claim a deduction for the part your employer paid. If you bought individual or family health insurance from one of the Affordable Care Act’s state-based or federally facilitated health insurance exchanges and received an advanced premium tax credit that decreased the cost of your health insurance, it is important to note that your subsidy cannot be claimed as a deduction. However, the premium portion that you paid out of your own pocket might be deductible. Read the “Paid your health insurance premiums with your own after-tax money?” section below for details.
You cannot take a deduction for health insurance you paid for with pre-tax money
The premiums you pay for job-based health insurance usually come out of your paycheck before your income taxes are calculated. Thus, your income appears smaller. This is similar to how the funds you contribute to a 401(K) retirement savings results in your income appearing smaller. Given that, you’ve paid premiums with pre-tax money. Pre-tax means you already received a tax benefit by not paying taxes on it, so you can’t get a second benefit on the same dollars. In other words, you cannot claim them as a deductible expense. Uncertain whether your health insurance premiums are taken out of your paycheck pre-tax or after-tax? Talk to your payroll department, or check your W-2. If your premiums are paid with pre-tax money, that money will not be included as income in Box1 (wages) on your W-2. If your premiums are paid with after-tax money, that money will be included as income on your W-2. If your premiums weren’t included as income on your W-2, you cannot take them as a deduction because they’re already tax-free.
Health insurance premiums that MAY BE tax deductible
· Self-employed? Your premiums may be tax deductible
If you’re self-employed and not eligible for an employer-sponsored health plan through your spouse or domestic partner, you may be able to write off your health insurance premiums. You can’t write off more in health insurance premiums than you earned, though.
When you’re self-employed, your health insurance premiums are considered an adjustment to your income; they are listed on the first page of Form 1040 instead of being listed with your other tax deductions on Schedule A. This appears to decrease your overall income. In some ways, this adjustment-to-income approach is better than a traditional deduction. Keep in mind that:
– If you don’t itemize your deductions, you’ll still benefit from the income-adjustment for your health insurance premiums.
– Many deductions are phased out at higher income levels. Decreasing your income by the amount of your annual health insurance premiums may help you stay beneath the phase-out level for other deductions.
– Many deductions can be taken only if they exceed a certain percentage of your income. The smaller your income appears, the easier it is to exceed that threshold and claim those deductions.