The IRS permits taxpayers to deduct supplemental insurance premiums on their taxes; however, before taking this deduction it’s important to keep certain details in mind.
Deductibility rules depend on both your employment status and whether or not you itemize deductions; for instance, health insurance premiums you pay as an employee may be payroll deducted before taxes and therefore aren’t tax-deductible on your tax return.
Deductible as a Medical Expense
Supplemental insurance premiums depend on how they’re purchased. Most nonretired Americans who possess supplemental health coverage through an employer pay pretax for payroll deduction. As such, most of this expense won’t be tax-deductible when filing taxes; however, for those purchasing their own supplementary policy directly they could potentially itemize deductions and meet 7.5% threshold on total medical costs over 8.
Supplemental insurance provides financial security for things such as short-term disability, dental and vision care costs, hearing aids and prescriptions not covered by the Affordable Care Act (ACA), such as copays and deductibles. No matter how you purchase it, though, it’s crucial that you keep a paper trail of every payment to prepare yourself in case an audit occurs by keeping track of each one made and keeping a written account of them all.
Self-employed individuals can often deduct the premiums for supplemental insurance as above-the-line deductions on Schedule A, since such policies are considered an investment in your health and part of overall medical expenses reported to the IRS. Unfortunately, unlike traditional health plans regulated by ACA regulations, supplemental policies don’t abide by such restrictions and could potentially deny coverage based on medical history or set caps on benefits.
Retirees often qualify to deduct their Medicare supplemental insurance premiums as qualified medical expenses on their taxes. Medicare Advantage plans and their supplementary Medicare plans fall under the “Medicare Advantage” umbrella, while Part D premiums qualify as medical expenses under the Affordable Care Act (ACA). Additionally, other forms of supplemental Medicare insurance–such as hospital indemnity, critical illness and long-term care coverage–can also qualify if your qualified medical expenses surpass 7.5% of AGI. However, Medicare Advantage or supplementary Medicare premiums paid directly to Social Security administration cannot be deducted as itemized deductions.
Deductible as a Business Expense
Your premiums may qualify as tax deductions as long as the policy purchased protects against an identifiable risk that could threaten financially harm to your business. According to the Internal Revenue Service (IRS), insurance should be considered an “ordinary and necessary cost of doing business”.
As medical care costs continue to soar, more employees find that their employer-sponsored health plans alone cannot cover all their out-of-pocket healthcare expenses. That’s where supplemental insurance comes into play – be it coverage for yourself or family supplemental plans can provide much-needed healthcare assistance.
Life insurance is an invaluable supplementary protection against unexpected financial strain in the event of death, covering your family’s expenses as a result. There are various forms of life policies available – term and permanent. While term life offers fixed monthly payments over an agreed upon term period, while permanent provides lifetime coverage with investment features incorporated. Depending on which policy type is selected, its premiums could even be tax-deductible as small business costs.
Disability insurance is another popular supplement to consider, providing income replacement in case of illness or injury. Furthermore, its premiums may even be tax deductible provided your disability is work related; to qualify for this deduction you must have experienced lost wages as a result of being injured at work and have medical proof from a licensed doctor supporting this claim.
Supplemental health insurance premiums may also qualify as tax deductible expenses provided they meet IRS guidelines. According to these criteria, your premium must be “reasonable and necessary” in relation to your line of work and provide “accurate and adequate protection” against an identifiable risk.
However, most health insurance premiums will not qualify as tax deductible expenses since they’re already being deducted with pre-tax dollars from paychecks – this practice of double dipping is illegal, according to Claire Hunsaker of AskFlossie Financial Community for Women. She notes however that W-2 employees paying their own health insurance may itemize deductions on federal income tax returns and have total medical expenses exceeding 7.5% of adjusted gross income (AGI).
Deductible as a Personal Expense
The Internal Revenue Service (IRS) offers taxpayers several deductions to reduce their taxable income, one of which is health insurance premiums as medical expenses. There are certain limitations and restrictions associated with this deduction: these premiums must have been paid and they must cover direct care services for an individual or their family; such coverage includes Medicare Part A, B and D premiums plus any supplemental or long-term care policies purchased as direct care costs.
Individuals who are not self-employed may also be eligible to deduct medical costs on their taxes if they itemize and their total medical expenses exceed 7.5% of income. Note, however, if an individual received subsidies through an exchange such as HealthShare Ontario they cannot also claim deductions on these premiums as this would constitute double-dipping and would violate double-declaring rules.
Employer-sponsored health insurance plans cannot typically claim premium payments as tax deductions since payroll deduction is pretax; however, those with health savings accounts or flexible spending accounts may be able to take advantage of tax-free withdrawals from these accounts for premium payment – this would avoid double dipping on taxes!
Medical expenses that qualify as tax deductible include costs related to diagnosing and treating illness or injury, such as hospital stays, surgery, X-rays; prescription drugs including insulin for dental care; transportation expenses related to doctor appointments; wheelchair ramp installation or purchasing special batteries for hearing aids. Also included may be costs associated with altering one’s home or vehicle for medical purposes such as adding wheelchair ramps.
Due to recent tax law changes enacted late 2017, individuals may find it less likely to itemize their deductions and itemize. It remains important to keep an accurate record of medical-related expenses throughout the year and compare them against your standard deduction when filing taxes.
Deductible as a Qualified Medical Expense
As health care costs increase in the US, more people are realizing their group health care plans don’t provide sufficient coverage. Supplemental policies may provide relief when out-of-pocket expenses exceed 7.5% of your adjusted gross income (AGI), plus any premiums paid can be deducted as qualified medical expenses on your taxes.
Supplemental insurance premiums may be tax deductible when itemizing medical and dental expenses on Schedule A of Form 1040. To claim this deduction, your total medical and dental expenses must exceed 7.5% of your AGI; this deduction includes Medicare premiums, deductibles, copayments and any out-of-pocket medical costs that exceed this threshold.
To claim the premium deduction, it’s essential that you possess adequate documentation of your deductibles and out-of-pocket expenses, such as copies of tax returns or receipts for prescriptions, copayments or out-of-pocket medical expenses. Furthermore, self-employed individuals should maintain records detailing earned income as well as expenses incurred through their business.
Supplementary policies should not be seen as a replacement for traditional healthcare plans; rather, they should be seen as an additional source of cover to cover treatment expenses not covered by traditional policies, including preventative care costs not covered by traditional plans, out-of-pocket expenses for services like doctor visits and medication expenses, as well as costs related to illness or injury.
As of 2022 and beyond, the IRS has expanded the list of medical expenses eligible for tax deduction to include costs associated with purchasing a supplemental insurance policy. Other eligible expenses now include medical transportation (the standard mileage rate plus parking and toll fees), health club membership dues and food and beverages that promote overall health – but does not include cosmetic surgery unrelated to disfiguring illnesses or injuries or dietary supplements. For more information on which expenses qualify as deductions visit their website and read Publication 502, which provides an overview of medical and dental expenses.
