No matter where or how you obtain health coverage, premiums for medical coverage can be costly. Luckily, the IRS offers tax breaks to individuals and families paying these premiums; this helps lower taxable income and therefore, your federal taxes bill when filing them. Unfortunately, the exact rules and requirements for deducting health insurance premiums can be complex depending on where and how you receive coverage as well as whether or not itemizing deductions is an option for you.
Health insurance premiums qualify as qualifying medical expenses and can be deducted as itemized deductions on Schedule A of Form 1040 as long as their cost exceeds 7.5% of your adjusted gross income (AGI). This rule applies if you have traditional individual or group coverage as well as premium subsidies through marketplace plans outside the Affordable Care Act (ACA).
When itemizing, the cost of your insurance is tax deductible in addition to other qualified medical expenses that you have paid during the year, including dental and vision coverage, prescription drug plans and long-term care policies. Furthermore, premiums paid towards health savings accounts that offer high deductible options for self-employed individuals can also be claimed as deductions.
If both you and your spouse are employed, if one pays premiums for health insurance through work they are payroll-deducted as pre-tax wages before being claimed as an employee benefit in box 1 of the W-2 statement.
Sole proprietors using after-tax dollars to purchase individual market or exchange marketplace health insurance using after-tax dollars may also deduct this type of premium as long as it satisfies certain rules and requirements, such as only using it during months where neither you nor your spouse were eligible to join an employer-provided health plan and not using it to cover more in premiums than net profit from business activities for that year.
Medicare premiums are usually tax-deductible as medical expenses provided you meet the 7.5% adjusted gross income requirement; however, self-employed individuals using their health savings account or 401(k) plan to cover Medicare Part B and Part D premiums can claim these expenses without meeting this threshold or itemizing deductions.
Self-employed workers with flexible spending accounts may use them to offset the costs of health insurance premiums and reduce taxable income without waiting until itemizing meets the 7.5% AGI threshold. However, you are not permitted to double dip when it comes to flexible spending accounts and health savings accounts; you may only deduct what exceeds your premium tax credit amount from each.