As with any area of risk management, the taxation of benefits and premiums must be considered. Typically, the benefits received under an individually owned medical insurance policy are not considered taxable income.
One of the benefits of owning medical insurance is found on Schedule A of the IRS 1040. If an individual or family's total medical expenses exceed 10% of their Adjusted Gross Income (AGI) – or 7.5% of their AGI if they or their spouse is 65 or older (but only as a temporary exemption through December 31, 2016) – they may deduct only the amount of those total medical expenses that exceed the 10% (or 7.5%) threshold as an itemized deduction. The deductible expenses include premiums for medical, dental and long-term care insurance. Also deductible are the total out-of-pocket expenses associated with the insurance types mentioned above, but only under certain circumstances, which differ for individual policies and policies from employers. Click here to read the IRS rules.
Jack's and his wife were both younger than 65 in 2014. Their AGI for 2014 was $75,000. They were able to itemize their tax deductions on Schedule A of their 1040. In 2014 they paid $4,200 in medical insurance premiums and $1,350 in dental insurance premiums for individual policies they own. That year Jack and his wife incurred $9,540 in medical expenses and $2,250 in dental expenses. They had a $2,500 deductible on their medical insurance policy and a $1,500 deductible on their dental insurance policy. Both policies paid 100% of the participant's expenses once deductibles are met. How much can Jack and his wife deduct for medical expenses on their 2014 taxes?
In computing what they can deduct, they can add the total amount they paid in premiums ($4,200+$1,350). They can also include the deductibles they paid ($2,500+$1,500). The total of their 2014 expenses is $9,550. The total of these expenses exceeds 10% of their AGI ($75,000 x 10%=$7,500) by $2,000 ($9,500 - $7,500 = $2,000). Thus, $2,000 is the amount they can deduct on their 2014 taxes.
Disability Income Insurance
Financial AdvisorAn overview of tax breaks for those who pay medical insurance premiums.
Financial AdvisorKnowing the tax deductions you're entitled to can make or break your bank account. Do you know about all these insurance-related deductions?
Personal FinanceWith insurance, a deductible is the amount of money the insured pays out-of-pocket before the insurance company pays for the loss.
Personal FinanceNot taking the standard deduction this year could save you hundreds of dollars.
Personal FinanceFor many self-employed people, health insurance premiums can make up a hefty percentage of their budget. Here are some tips on how to deduct them.
Personal FinanceThe receipts you cram into your wallet could be replaced with cash come tax season.
Financial AdvisorFind out about these deductions and how you can use them to lower your tax bill.
Personal FinanceTo lower your tax bill, be sure not to miss out on these commonly overlooked medical tax deductions.
Financial AdvisorInvestment expenses can be deducted by those who meet three main criteria. Here's what they are and how they work.
RetirementThis is the last year in which seniors only have to reach 7.5% of adjusted gross income before they can start deducting medical expenses.