Tax deductibility of health insurance premiums depends on the nature and structure of your business and filing method. This article details rules applicable to those filing as self-employed as well as receiving reimbursements through an Affordable Care Act Premium Tax Credit and similar programs.
Medical and long-term care premiums paid are tax deductible as an adjustment to income on Schedule A (Form 1040) up to 7.5% of your adjusted gross income.
Itemized Deductions
Health insurance premiums may be one of the many medical expenses you can deduct on your tax return, along with co-pays, deductibles, prescription medication costs and transportation to and from medical treatments such as mileage for personal vehicle use, bus fare or gas usage. In certain situations you can even write off some costs associated with food and drinks consumed while receiving care at hospitals or doctor’s offices; also any lodging costs for overnight stays; you can find the complete list in IRS Publication 502, Medical and Dental Expenses.
Those employed with an employer that offers group health insurance can only write off premiums paid by their company; whereas, self-employed people can claim any premiums they pay towards their coverage as an above-the-line deduction on their taxes, this deduction being applicable to you, your spouse and any tax dependents living with you as well as sole proprietors or partners in partnerships.
Long-term care or life insurance premiums paid can also be claimed as an above-the-line deduction if you’re self-employed, have net profits in your business, and pay an annual premium equal to 7.5% of adjusted gross income. You can claim this write-off regardless of whether or not itemizing deductions is claimed.
Avoid deducting from medical expense deductions amounts included on box 1 of your W-2 or as advance payments of premium tax credit on the Marketplace, such as health insurance premium payments or reimbursement of previously claimed premiums like sick leave payments.
Your medical expense deduction does not apply to amounts you spend for psychiatric care, including psychoanalysis or stays at mental institutions. However, you can claim any reasonable meals costs related to traveling between institutions as a medical expense deduction.
Self-Employed Deductions
Self-employed contractors have access to an extraordinary health insurance premium deduction. Contractors can write off 100% of health insurance premiums paid on themselves, their spouses and children as deductible expenses; this offers significant savings but there must first be fulfilled certain rules and requirements in order to claim this deduction.
To qualify, contractors must be self-employed and earn a net profit from their business during the year. Health insurance premiums that can be deducted against this net profit limit cannot exceed it; additionally, the contractor must demonstrate that these payments serve as adjustments to income for business purposes.
Health insurance deductions can be claimed even by individuals who do not itemize their deductions. It should be noted, however, that this deduction only applies if net profits from business are deducted and it should not be seen as additional medical expense deduction. Also note that this does not apply if one is covered under an employer-sponsored health plan or family plan.
Calculating deductions can be complex, so self-employed individuals are encouraged to seek professional guidance or utilize tax software in order to ensure accuracy and compliance with IRS regulations. Individuals should maintain meticulous records of all out-of-pocket expenses throughout the year to help determine which expenses qualify as tax deductible items and the corresponding deduction amounts when filing their taxes. Individuals can take full advantage of their health insurance deduction and maximize tax savings with proper guidance and planning. BambooHR makes managing compensation for independent contractors simpler by tracking deductions and processing payroll – simplifying compensation management processes across a range of services and platforms. Discover how our intuitive cloud-based platform can streamline your HR processes with its user-friendly features, like innovative time cards and customizable reports. Request a demo now, and let us show you everything! Plus, with our new mobile app access your data whenever needed from anywhere!
Excess Reimbursement
An excess is a part of your health insurance policy that you pay toward each valid claim. It’s voluntary, so when purchasing or renewing health insurance you can select a level of excess when choosing or renewing policy – perhaps opting for small or nil excess can lower premiums and only needs to be paid once annually, even if multiple claims occur within that time. Excesses also reset with each renewal of policy.
As an employee, health insurance premiums paid are tax-deductible in the year they’re paid – just check your paycheck stub or W-2 to determine how much was withheld from your paycheque for health coverage. COBRA and Medicare premiums may also be deducted; you can write off Medicare Part B, C, D as well as supplemental prescription drug plans; however if enrolled in Part A only, premiums may only be written off if neither you nor a previous employer who paid Medicare tax paid them;
If you receive advance credit payments (also referred to as premium tax credits) from Covered California, each member of your household should file Form 1095-A with them detailing how much money was received as advance credits during 2018. Should there be changes in household income during 2018, report this immediately so the Marketplace can adjust your advance credit payments appropriately.
Self-employed taxpayers only qualify to deduct medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI). If your AGI is too high or you qualify for other deductions or credits, these expenses may not qualify as tax deductions.
Normally, long-term care insurance premiums do not qualify as medical expenses; however, retired public safety officers can include their premiums under medical expenses if the plan offered through their state department of retirement services.
Tax Credits
The Affordable Care Act (ACA) introduced several tax benefits designed to make health insurance premium payments simpler for many Americans, known as premium tax credits (PTC) and cost-sharing reductions (CSR). These subsidies may help lower both monthly premiums for Marketplace policies as well as out-of-pocket expenses such as deductibles and copays.
Your personal tax credit (PTC) eligibility depends on family size and household income as determined by the Marketplace calculator, making this tool an accurate way of estimating it before enrolling in a Marketplace plan. Your PTC could either be paid directly to your insurer monthly, or taken as one lump sum come tax time; ultimately the final amount you claim depends on how your household income fluctuates during the year, so if this changes contact Covered California immediately with details.
If you receive advance payments of the PTC, filing a federal tax return each year is imperative in reconciling the advance credit based on estimated annual income with what your actual annual income entails. If it exceeds what was projected for, any excess advance credits must be repaid while lower income may lead to additional credits being granted.
When filing taxes to claim the PTC, you are also required to disclose any other health coverage you have such as employer-sponsored health plans, Medicare Part A & B, Medicaid or any other sources such as interest and dividends from bank accounts.
Self-employed individuals may be eligible to deduct health insurance premiums and related business expenses as tax deductions. You can also write off any unused funds you contribute to an HSA (Health Savings Account), although these accounts have contribution limits and other restrictions which must be taken into consideration when contributing funds. It would be prudent to consult a tax professional so you take full advantage of all deductions available to you.
