Take a close look at your monthly expenses and there’s a good chance that health insurance is right near the top of the list. For individuals without a government subsidy, the average premium for plans sold on a healthcare exchange last year was $440 per month, according to the comparison website eHealthInsurance. Family plans, meanwhile, cost an average of $1,168 a month.
With so many consumers crunched by rising healthcare expenses, you may be wondering if you can at least get a tax break on your premiums. The answer: It depends. Your premiums may already be tax-free if you pay them through a payroll deduction at work. If not, you can still claim a deduction if your total healthcare costs are high enough.
Self-employed individuals may also be qualified to write off their health insurance premiums, but only if they meet certain criteria.
- If you receive health insurance through your employer, your contributions are likely made with pre-tax dollars. Therefore, you can't deduct your portion of the premiums at year's end.
- You can deduct premiums—and other healthcare costs—if your expenses exceed 10% of your adjusted gross income, or AGI. However, you can only deduct the amount that exceeds 10% of AGI.
- Self-employed individuals who meet certain criteria can deduct premiums, even if they don't meet the 10% threshold. However, they can't deduct more than the amount of income their business generated.
The 10% Rule
Roughly half of Americans receive health insurance through an employer-based plan, according to eHealthInsurance. If you have a payroll deduction in place, chances are that you’re paying your share of the premium with pre-tax dollars. That means you can’t deduct your premiums at the end of the year, or you’d be deducting that expense twice.
However, you may be able to deduct some of your premiums if you paid for insurance on your own using after-tax dollars. For the 2019 tax year, you’re allowed to deduct any qualified unreimbursed healthcare expenses you paid for yourself, your spouse, or your dependents—but only if they exceed 10% of your adjusted gross income (AGI). That’s a higher bar than 2017 and 2018, when costs topping 7.5% of AGI were eligible for the deduction.
Qualified expenses include premiums paid for a health insurance policy, as well as out-of-pocket outlays for things like doctor visits, surgeries, dental and vision care, and mental health. You can deduct only the expenses above and beyond 10% of your AGI, which equals your income minus certain expenses such as alimony payments (if arranged before 2019) and retirement plan contributions.
Suppose, for instance, that your adjusted gross income for the year was $50,000. Ten percent of that amount is $5,000, so any qualified expenses exceeding that amount are deductible. If your total medical expenses, including premiums, was $6,000, you’d be able to deduct $1,000 from your taxable income.
Make sure you don’t include any reimbursed expenses when doing your calculation—such as “premium tax credits,” the income-based government subsidies that help defray the cost of premiums sold on an exchange. You should also leave off any expenses that were reimbursed by your insurance company or your employer.
In order to deduct medical expenses, you have to itemize your deductions.Therefore, you’ll want to make sure that your total deductions exceed the standard deductions before doing so. In 2019, the standard deduction increased to $12,200 for those filing an individual return and $24,400 for married couples filing jointly.
Deductions for the Self-Employed
One exception to the 10% rule is for individuals who run their own business. In that case, you’re allowed to deduct the entirety of your premium payments, but only if you’re not eligible to participate in another employer’s plan. That may preclude you from taking the write-off if you have another job. Nor can you deduct premiums if you’re able to get coverage through your spouse’s workplace plan.
The deduction for self-employed individuals is limited by the amount of your business income, however. In any given year, you can’t deduct more than the amount of income you generate through your company.
Individuals who operate more than one business can designate only one of them as the health insurance plan sponsor; you can’t simply add up the income for multiple companies in order to claim the maximum deduction. Therefore, it may be a good idea to choose your most profitable business as the plan sponsor in order to increase the amount of tax relief.
The deduction for self-employed individuals is considered a write-off to your personal income. So if you’re a sole proprietor, you would enter the amount of the deduction on Form 1040 itself, rather than on your Schedule C (“Profit or Loss from Business”).
Other Ways to Lower Your Tax Bill
Even if you’re not eligible to deduct health insurance premiums—either because you don’t meet the cost threshold or opt to use the standard deduction—there are other ways to use the tax code in order to reduce your overall medical expenses.
You might consider buying a high-deductible health plan (HDHP) on the individual market, for example. These plans generally have lower premiums than other policies and enable you to use a health savings account (HSA) to pay out-of-pocket expenses (ordinarily they can’t be used for insurance premiums). Your contributions to an HSA are tax-deductible and, when used for eligible expenses, your withdrawals are tax-free, too.
By selecting an HDHP, you’re transferring more of your overall medical costs to a savings vehicle that provides tax benefits. The higher the tax bracket you’re in, the more you stand to gain from those savings. For 2019, the IRS considers a high-deductible health plan an individual policy with a deductible of at least $1,350 or a family policy with a deductible of at least $2,700.
In some cases, you’re able to pay health insurance premiums with HSA funds, too, which means they’re tax-free. One such scenario: when you temporarily stay on your previous employer’s plan. The Consolidated Omnibus Budget Reconciliation Act of 1985, better known as COBRA, allows you to maintain group coverage for up to 18 months after you leave your job or lose your insurance because you’re working fewer hours.
You can pay insurance premiums from funds in a health savings account if you receive COBRA coverage from your former employer or are receiving unemployment benefits. That way, you can use pre-tax money to keep your medical coverage in force.
Whereas most employers who offer health insurance will subsidize your premiums, you typically foot the entire bill when you continue your coverage under COBRA. If you have a HDHP and use a health savings account, however, at least you can pay those premiums with pre-tax dollars.
Another exception is available to those receiving unemployment benefits. Those individuals can also pay premiums through their health savings account, as long as they have an HDHP.
High-deductible plans aren’t necessarily right for everyone. If you have a pre-existing medical condition or expect to incur significant healthcare expenses in the year ahead, you may want to opt for more robust coverage. You should carefully weigh your options during the open enrollment period in order to find the plan that best meets your needs.
The Bottom Line
Premiums that you pay for your employer’s plan are likely tax-free already. However, in some limited circumstances, you may be able to get tax relief when you pay for a plan on your own.
You’re eligible to deduct premiums, for example, if your total healthcare costs exceed 10% of your adjusted gross income or if you’re self-employed. In the latter case, you may be able to write off the full amount of premiums as long as the amount doesn’t exceed your business income.