For some Americans, health insurance is one of their largest monthly expenses. As the price of healthcare rises, some consumers are seeking out ways to reduce their costs through tax breaks on their monthly health insurance premiums.

If you are enrolled in an employer-sponsored health insurance plan, your premiums may already be tax-free. If your premiums are made through a payroll deduction plan, they are likely made with pre-tax dollars, so you would not be allowed to claim a year-end tax deduction.

However, you may still be able to claim a deduction if your total healthcare costs for the year are high enough. Self-employed individuals may be qualified to write off their health insurance premiums, but only if they meet certain criteria.

Key Takeaways

  • If you are enrolled in an employer-sponsored plan and your premiums are made through a payroll deduction, they are likely made with pre-tax dollars and you would not be allowed to claim a year-end tax deduction.
  • You can deduct your health insurance premiums—and other healthcare costs—if your expenses exceed 10% of your adjusted gross income (AGI).
  • Self-employed individuals who meet certain criteria may be able to deduct their health insurance premiums, even if their expenses do not exceed the 10% threshold.

According to research by the Kaiser Family Foundation, a non-profit organization that focuses on healthcare issues in the U.S., roughly half of Americans receive health insurance through an employer-based plan.

If your medical premiums are deducted through a payroll deduction plan, it's more than likely that you’re covering your share of your insurance premium with pre-tax dollars. So, if you deducted your premiums at the end of the year, you’d effectively be deducting that expense twice.

Deductions for Qualified Unreimbursed Healthcare Expenses

However, you may be able to deduct some of your premiums if you purchase health 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).

AGI is a modification of your gross income. It includes all your sources of income—wages, dividends, alimony, capital gains, interest income, royalties, rental income, and retirement distributions—minus any number of allowable deductions from your income, including retirement plan contributions, student loan interest payments, losses incurred from the sale or exchange of property, early-withdrawal penalties levied by financial institutions, among others.

This is a higher amount than in previous years. In 2017 and 2018, any healthcare costs that were greater than 7.5% of AGI were eligible for the deduction.

Expenses that qualify for this deduction include premiums paid for a health insurance policy, as well as any out-of-pocket expenses for things like doctor visits, surgeries, dental care, vision care, and mental health care. However, you can deduct only the expenses that exceed 10% of your AGI.

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, were $6,000 in total, 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. Some individuals are eligible for premium tax credits if they've purchased their own insurance through the Health Insurance Marketplace.

The Marketplace is a platform for individuals, families or small businesses to purchase health insurance and it was created as a result of the Affordable Care Act in 2010 as a means to achieve maximum compliance with the mandate that all Americans carry some form of health insurance. If your purchase health insurance through the exchange, you may receive 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, rather than electing the standard deduction. Therefore, it is in your best interest to make sure that your total itemized deductions exceed the standard deduction amount before making this decision. For the tax year 2019, the standard deduction was $12,200 for those filing an individual return and $24,400 for married couples filing jointly.

Deductions for the Self-Employed

There is an exception made to the 10% rule for individuals who run their own businesses. If you are self-employed, you’re allowed to deduct the entirety of your premium payments. However, if you are eligible to participate in another employer’s plan and elect not to, you cannot take this deduction. If you are self-employed but you have another job, that may preclude you from this deduction.

Similarly, if you are eligible to receive coverage through a spouse's employer-sponsored plan, this may also preclude you from this deduction.

There are also limitations imposed on self-employed individuals based on the amount of their business income. In any given year, a self-employed person cannot deduct more than the amount of income they generate through their business operations.

Individuals who operate more than one business can designate only one of them as the health insurance plan sponsor; you cannot add up the income generated by multiple companies in order to claim the maximum deduction. In the case of self-employed persons, it may be in their best interest to choose their most profitable business as the plan sponsor in order to increase their potential amount of tax relief.

The deduction for self-employed individuals is considered a write-off to their personal income taxes; it is not deducted when they are filing on behalf of any of their business operations. For example, in the case of a sole proprietor, they would enter the amount of the deduction on their Form 1040, rather than on their Schedule C form, otherwise known as “Profit or Loss from Business”.

Other Ways to Lower Your Tax Bill

If you’re not eligible to deduct your health insurance premiums—either because you don’t meet the cost threshold or because you opt to take the standard deduction when you're filing taxes—there are other ways to reduce your overall medical expenses.

You might consider electing a high-deductible health plan (HDHP) as a type of insurance coverage. HDHPs typically offer lower premiums than other plans. They also offer the unique feature of enabling plan subscribers to open up a Health Savings Account (HSA), a tax-advantaged savings account. Money that is contributed to an HSA account can be used to pay for out-of-pocket healthcare expenses. 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 account that has added tax benefits. The higher the tax bracket you’re in, the more money you can save by utilizing an HDHP. For the tax year 2019, the IRS considers an HDHP an individual insurance policy with a deductible of at least $1,350 or a family policy with a deductible of at least $2,700.

In some instances, you may be able to pay health insurance premiums with your HSA funds, too. This would mean that your premiums would also be paid with pre-tax dollars. One scenario where this might be a possibility is if you temporarily stay on your previous employer’s plan. The Consolidated Omnibus Budget Reconciliation Act (COBRA) created a provision that allows qualified individuals to maintain group coverage for up to 18 or 36 months (depending upon applicable scenarios) after you leave your job or if you become ineligible for insurance coverage through your employer-sponsored plan because you’re working fewer hours.

You can pay your insurance premiums using pre-tax dollars in a health savings account (HSA) if you enroll in COBRA or are receiving unemployment insurance.

Whereas most employers who offer health insurance will contribute partially to the total amount of your premiums, when you gain coverage under COBRA, you typically become responsible for covering the entire amount of your premiums.

If prior to selecting coverage through COBRA, you had an HDHP with an HSA through your employer, you typically have the option of taking your HSA account with you and continuing to contribute to it. So, while your premiums may be higher in this scenario, you have the advantage of being able to pay for those premiums with pre-tax dollars.

If you are receiving unemployment insurance, you may also pay your premiums with pre-tax dollars, provided that you are enrolled in an HDHP and have an HSA account.

While an HDHP can offer some tax benefits, they aren’t necessarily an appropriate healthcare solution 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 select a plan that offers more comprehensive coverage.

Because of the features of an HDHP, they are typically only recommended for individuals who are younger or generally healthier and who don’t expect to need healthcare coverage except in the face of a serious health emergency. 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

If you are enrolled in an employee-sponsored plan, your premiums are likely already tax-advantaged. However, in some limited circumstances, you may be able to claim a tax deduction when you purchase your own insurance plan.

For example, you can deduct the amount you spent on your health insurance premiums if your total healthcare costs exceed 10% of your adjusted gross income (AGI) or if you’re self-employed. In the latter case, you may be able to write off the full amount that you paid for premiums (as long as the amount doesn’t exceed your business income).