Can You Deduct Insurance Premiums On Your Taxes – When it comes to filing taxes, getting the lowest tax liability has nothing to do with skill. It’s about what you know. Unfortunately, many taxpayers miss out on deductions and credits simply because they are unaware of them. Some of the most overlooked deductions concern health and medical expenses and insurance premiums. Note that the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated many deductions but left most of those discussed below unchanged.
Disability insurance is probably the most common insurance premium tax deduction. This type of insurance can provide additional income if you are disabled and unable to work. However, the deduction of these premiums is complex and limited.
Can You Deduct Insurance Premiums On Your Taxes
The Internal Revenue Service (IRS) allows self-employed taxpayers to have disability “overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or illness.” But “you cannot deduct premiums for a policy that pays for loss of earnings due to illness or disability.”
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Essentially, the only deductible disability insurance is the kind that covers business overhead expenses while you’re on vacation. This type of insurance will cover items such as rent and utilities that are not avoided for the duration of the disability leave.
If the premium is deducted, any proceeds from the policy will be considered taxable income. In contrast, policy benefits will not be taxed if you pay the premium yourself and do not deduct the premium – an arrangement used by some taxpayers so they can receive tax-free benefits to cover business overhead expenses if they become disabled. The proceeds are taxable even if your employer paid for disability insurance and not if you bought it yourself with your after-tax dollars.
There are several rules you must follow if deducting health insurance expenses. They’re based on your employment status, whether you itemize deductions, and whether you paid your premiums using pre- or after-tax dollars.
An insurance-related tax benefit that people without access to traditional group health coverage should be aware of is a health savings account (HSA), which combines a tax-advantaged savings element with a high-deductible health insurance policy.
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All HSA contributions, up to the maximum allowed by law, are tax deductible, even for those who do not itemize on Schedule C. For the 2022 tax year, you could contribute up to $3,650 if you had a self-covered plan, or $7,300 per person with family coverage — with an additional $1,000 contribution allowed for taxpayers over age 55. For the 2023 tax year, those amounts are $3,850 and $7,750. The contribution to the catch remains $1,000.
Employers can also contribute to an HSA on behalf of employees, similar to a 401(k). However, the combination of employer and employee premiums cannot exceed the annual contribution limit for each type of coverage.
Health Savings Accounts (HSAs) can yield a triple tax benefit through tax-deductible contributions, tax-deferred growth and tax-free withdrawals when the funds are used to pay qualified medical expenses.
Medical expenses are deductible but only to the extent that they exceed a certain percentage of the taxpayer’s adjusted gross income (AGI). This percentage keeps changing due to different legislation (recently ranging from 7.5% to 10%), but it always remains high enough to prevent most people from qualifying. The percentage is 7.5% of your AGI for the 2022 and 2023 tax years.
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If you are below the medical expense deduction threshold and have medical procedures you are waiting to schedule next year, you can try to schedule them this year. This will increase your medical expenses this year, but you may be able to meet the deductible threshold (be sure to calculate this before you have the procedures to ensure you meet the threshold). Keep in mind that if your insurance company reimburses you the following year, you will have to declare the amount of the deduction that was reimbursed as income in that year.
For example, imagine you deducted $17,000 for surgery one year, and your insurance company sent you a check for $10,000 for the surgery the following year. $10,000 will have to be declared as income in the year the check arrives.
If there is a chance that you may have medical expenses covered by your insurance company in the future, you do not need to claim this deduction. You can always file an amended return for the year in which you would have received the deduction if your insurance claim was denied.
It is important to distinguish between unemployment compensation paid through a state unemployment agency and workers’ compensation, which is awarded to employees who cannot perform their duties as a result of an injury.
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Unemployment benefits are always taxable, as they are considered a substitute for regular income. You will receive a 1099-G form detailing the total unemployment benefits you received during the year, and this amount must be reported on IRS Form 1040. Do not report workers’ compensation benefits you receive as income. This also includes residual benefits.
Self-employed taxpayers and other business entities can deduct business-related insurance premiums, including health and dental insurance premiums and long-term care premiums. Car insurance can be deducted even if the taxpayer chooses to report actual expenses and does not take the standard mileage rate.
Be sure to keep records of all premiums paid for eligible insurance expenses and any other deductible expenses you intend to claim, such as computer equipment or a home office.
Qualified plans are not the only type of retirement savings vehicle that can be funded through tax-deductible premiums, such as 412(e)(3) plans. These defined benefit plans can provide significant deductions for small business owners looking to catch up on their retirement savings and receive a guaranteed income stream in the future.
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These plans are funded exclusively with insurance products such as cash value life insurance or fixed annuity contracts. The plan owner can deduct up to hundreds of thousands of dollars in contributions to this plan each year.
Participants in standard qualified plans, such as a 401(k) plan through an employer, can purchase a limited amount of term or permanent life insurance coverage, subject to specific restrictions. But the coverage must be considered “incidental” according to income tax regulations.
According to the IRS, an insurance policy is considered “incidental” if “less than 50 percent of the employer premiums credited to each participant’s account are used to purchase regular life insurance policies during the participant’s lifetime.”
Life insurance death benefits paid by qualified plans enjoy tax-exempt status, and this insurance can be used to pay the taxes on the plan proceeds to be distributed when the participant dies.
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Life insurance can help you provide a measure of family security for your loved ones should something happen to you. You may be wondering if life insurance premiums can be deducted on your tax return, and the answer is usually no. But premiums are deductible as an expense related to the business (if the insured is an employee or officer in the company and if the company does not directly or indirectly benefit from the policy).
Although death benefits to business-related beneficiaries are often tax-free, there are certain situations in which the death benefit for a corporate-owned life insurance policy can be taxable. However, employers who offer group life coverage to employees can deduct premiums they pay for the first $50,000 of benefits per employee, and amounts up to that limit are not counted as employee income.
This is a dollar amount that taxpayers can deduct from their gross income. When you take tax deductions to which you are entitled, you reduce your taxable income. That way, you lower your tax bill.
A person paying for deductibles only can contribute up to $3,850. A person with family coverage can contribute up to $7,750. Those over 55 can contribute an additional $1,000. These amounts are tax deductible.
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Yes. If you are self-employed, you can deduct medical, dental and long-term care insurance premiums. Insurance premiums related to the business can also be deducted.
These are just a small part of the common deductions and tax benefits related to insurance that businesses, self-employed and individual taxpayers are entitled to. Other deductions relating to compensation, production and depreciation of buildings and equipment are detailed on the IRS website.
Talk to your accountant or other tax professional to determine the insurance-related tax deductions you can claim to help minimize what you owe.
Requires writers to use primary sources to support their work. These include white papers, government data, original reporting and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate and unbiased content in our editorial policy. Sarah is an IRS Enrolled Agent and former staff writer at Keeper. In 2022, she was named one of CPA’s Top 20 Influencers for the CPA Practice in Accounting. Her work has been featured in Business Insider, Money Under 30, Best Life, GOBankingRates and Shopify. Sara has spent nearly a decade in public accounting experience, and has extensive experience in strategic tax planning at the state and federal level. Her customers came from
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