Can You Claim Insurance Premiums On Taxes – Health insurance is one of the most important monthly expenses for some Americans, leading them to consider which medical expenses are tax deductible to reduce their bill. As the price of health care rises, some consumers are looking to reduce their costs through tax deductions on their monthly health insurance premiums.
If you are enrolled in an employer-sponsored health insurance plan, your premiums may be tax-free. If your premiums are made through a payroll deduction plan, they are likely made with pre-tax dollars, so you are not allowed to claim a year-end tax deduction.
Can You Claim Insurance Premiums On Taxes
However, you may still be able to claim a deduction if your total health care expenses for the year are substantial. This article will explore tax-deductible medical expenses, including the requirements for eligibility.
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Health insurance premiums, the amount paid upfront to keep an insurance policy active, continue to rise as health care costs increase in the United States. Premiums can be considered the “maintenance fee” for a health care policy, excluding other charges that consumers must pay, such as deductibles, co-pays, and additional costs from in the pocket.
When the Affordable Care Act was passed by President Barack Obama in 2010, it allowed some families to access premium tax credits on their health insurance plans, easing some of the burden of rising health insurance premiums.
According to research by the Kaiser Family Foundation, a non-profit organization that focuses on health care issues in the U.S., nearly half of Americans receive health insurance through an employer-based plan.
If your medical premiums are deducted through a payroll deduction plan, you are more likely to cover your share of your insurance premiums with pre-tax dollars. So, when you cancel your premiums at the end of the year, you effectively cut the cost twice.
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However, you can deduct some of your premiums if you buy health insurance yourself with after-tax dollars. For the 2022 and 2023 tax years, you’re allowed to deduct any qualified unreimbursed health care expenses you pay for yourself, your spouse, or your dependents—but only if they exceed 7.5% of your adjusted gross income (AGI).
AGI is a change in your gross income. This includes all of your sources of income—wages, dividends, spousal support, capital gains, interest income, royalties, rental income, and retirement distributions—minus any number of allowable deductions from your earnings, including retirement plan contributions, student loan interest payments, losses incurred from the sale or exchange of property, early withdrawal penalties imposed by financial institutions, etc.
Expenses that qualify for this deduction include premiums paid for a health insurance policy, as well as any out-of-pocket expenses for things like doctor visits, surgeries , dental care, vision care, and mental health care. However, you can deduct expenses that exceed 7.5% of your AGI.
Let’s say, for example, that your adjusted gross income for the year is $50,000. Seven and a half percent of that amount is $3,750, so any qualified expenses that exceed that amount is deductible. If your total medical expenses, including premiums, are about $6,000 in total, you can deduct $2,250 from your taxable income. Make sure you don’t include any deductible expenses when making your calculation, such as premium tax credits. Some individuals are eligible for premium tax credits if they purchase their insurance through the Health Insurance Marketplace, also known as “The Marketplace.”
Health Insurance Plans
Marketplace is a platform for individuals, families, or small businesses to purchase health insurance. It was created as a result of the Affordable Care Act of 2010 to achieve maximum compliance with the mandate that all Americans carry some form of health insurance. If you buy health insurance through an exchange, you may receive income-based government subsidies that help defray the cost of premiums sold on an exchange. If your estimated income falls between 100% and 400% of the federal poverty level for your household size, you qualify for a premium tax credit, according to the HealthCare.gov website. Until 2025, if your income is above 400% FPL, you may still qualify for premium tax credits that lower your monthly premium for a Marketplace health insurance plan.
It helps if you waive any expenses paid by your insurance company or your employer. To reduce medical expenses, you should itemize your deductions rather than opting for the standard deduction. Therefore, it is in your best interest to make sure that your total itemized deductions exceed the standard deduction amount before making this decision.
For tax year 2022, the standard deduction is $12,950 for those filing an individual return and $25,900 for married couples filing jointly — and for tax year 2023, the standard deduction will increase of $13,850 for individuals and $27,700 for couples filing joint returns.
There is an exception made to the 7.5% rule for individuals who run their own businesses. Among the many other tax deductions and benefits available to self-employed individuals, you are allowed to deduct all of your premium payments from your adjusted gross income, regardless of whether you itemize your deductions. However, you may not be eligible for this deduction if you:
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There are also limits imposed on self-employed individuals based on the amount of their business income. In any given year, a self-employed person cannot deduct more than the income they earn through their business operations. Individuals operating more than one business may designate only one of them as a health insurance plan sponsor; you cannot increase the income generated by many companies to claim the maximum deduction. In the case of self-employed people, it will be in their best interest to choose their most profitable business as the plan sponsor to increase their potential amount of tax relief.
The deduction for self-employed individuals is considered a deduction from their income taxes; it is not withdrawn when they file for any operation of their business. For example, in the case of a sole proprietor, they will enter the amount of the deduction on their Form 1040 instead of their Schedule C form, otherwise known as “Profit or Loss from Business.”
If you’re not eligible to deduct your health insurance premiums—either because you don’t meet the expense threshold or because you choose to take the standard deduction when you file taxes—there are other ways to reduce your overall medical costs.
You may want to consider choosing a high-deductible health plan (HDHP) as a type of insurance coverage. HDHPs typically offer lower premiums than other plans. They also offer the unique feature of enabling plan subscribers to open a Health Savings Account (HSA), a tax savings account. Money contributed to an HSA account can be used to pay for out-of-pocket health care costs. Your contributions to an HSA are tax-deductible and, if used for eligible expenses, your withdrawals are tax-free, too.
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By choosing an HDHP, you are moving more of your total medical expenses into a savings account with additional tax benefits. The higher the tax bracket you are in, the more money you can save by using HDHP. For tax years 2021 and 2022, the IRS considers an HDHP to be an individual insurance policy with a deductible of at least $1,400 or a family policy with a deductible of at least $2,800. For tax year 2023, a high deductible health plan is defined as a plan with an annual deductible of no less than $1,500 for self-only coverage or $3,000 for family coverage, and where the annual out-of -pocket maximums do not exceed $7,500 for self-only coverage or $15,000 for family coverage.
In some cases, you can pay health insurance premiums with your HSA funds, too. This means that your premiums will also be paid with pre-tax dollars. One scenario where this is possible is if you are temporarily staying on your former employer’s plan.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) created a provision that allows qualified individuals to maintain group coverage for up to 18 or 36 months (depending on applicable circumstances) after they leave their job or if they become unemployed. qualify for insurance coverage through an employer-sponsored plan because they work fewer hours.
While most employers who offer health insurance will contribute partially to the total cost of your premiums, when you gain coverage under COBRA, you will usually be responsible for covering the full cost of your premiums. If, before choosing coverage through COBRA, you had an HDHP with an HSA through your employer, you usually have the option of taking your HSA account with you and continuing to contribute to it. So, while your premiums may be higher in this scenario, you have the advantage of paying for premiums with pre-tax dollars.
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If you’re receiving unemployment insurance, you can also pay your premiums with pre-tax dollars, as long as you’re enrolled in an HDHP and have an HSA account.
While an HDHP can offer some tax benefits, it is not an appropriate health care solution for everyone. If you have a pre-existing medical condition or expect to have large health care expenses during the year