For some Americans, health insurance is one of their largest monthly expenses, leading them to wonder what medical expenses are tax-deductible to reduce their bill. 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. This article will explore tax-deductible medical expenses, including the criteria for eligibility.
- Health insurance premiums, the amount paid upfront in order to keep an insurance policy active, have been steadily increasing as the cost of healthcare has increased in the United States.
- When the Affordable Care Act was passed by President Barack Obama in 2010, it allowed certain families to access premium tax credits on their health insurance plans.
- 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 7.5% 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 7.5% threshold.
Tax Deductions Vs. Tax Credits
Understanding Health Insurance Premiums
Health insurance premiums, the amount paid upfront in order to keep an insurance policy active, have been steadily increasing as the cost of healthcare has increased in the United States. Premiums can be thought of as the "maintenance fee" for a healthcare policy, not including other payments that consumers have to pay such as deductibles, co-pays, and other out-of-pocket costs.
When the Affordable Care Act was passed by President Barack Obama in 2010, it allowed certain families to access premium tax credits on their health insurance plans, relieving some of the burdens of skyrocketing health insurance premiums.
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 2020 and 2021 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 7.5% of your adjusted gross income (AGI).
AGI is a modification of your gross income. It includes all your sources of income—wages, dividends, spousal support, 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 lower amount than in 2019, in which any healthcare costs that were greater than 10% of AGI were eligible for the deduction. In 2017 and 2018, the cutoff was also 7.5%.
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 7.5% of your AGI.
How to Calculate Your Healthcare Deductions
Suppose, for instance, that your adjusted gross income for the year was $50,000. Seven and a half percent of that amount is $3,750, 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 $2,250 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, also known as "The 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. According to the Healthcare.gov website, "if your estimated income falls between 100% and 400% of the federal poverty level for your household size, you qualify for a premium tax credit."
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 2020, the standard deduction is $12,400 for those filing an individual return and $24,800 for married couples filing jointly. For the tax year 2021, the standard deduction is $12,550 for those filing an individual return and $25,100 for married couples filing jointly.
Medical Expense Deductions for the Self-Employed
There is an exception made to the 7.5% rule for individuals who run their own businesses. Among the many other tax deductions and benefits that self-employed individuals can claim, you’re allowed to deduct the entirety of your premium payments from your adjusted gross income, regardless of if you itemize your deductions. However, you may be precluded from this deduction if you are:
- Eligible to participate in another employer’s plan and elect not to
- Self-employed, but you have another job that offers a health plan
- Eligible to receive coverage through a spouse's employer-sponsored plan.
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 years 2020 and 2021, the IRS considers an HDHP an individual insurance policy with a deductible of at least $1,400 or a family policy with a deductible of at least $2,800.
COBRA and HSA Funds
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.
The American Rescue Plan, signed by President Biden on March 11, 2021, made buying insurance through COBRA less expensive, but only temporarily. Under normal circumstances, a taxpayer who signs up for COBRA may have to pay at least 102% of the cost of the premium. However, under this new legislation, the government will pay the entire COBRA premium from April 1 through Sept. 30 for people who have lost a job or had their hours cut.
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.
Limitations of an HDHP
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 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.
What Medical Expenses Are Tax Deductible? FAQs
What Medical Costs Are Tax-Deductible in 2020?
Tax-deductible medical costs include payments to doctors, dentists, surgeons, inpatient hospital care, acupuncture treatments, participation in weight-loss programs, and more. The Internal Revenue Service has a list of examples of deductible medical expenses on its website.
What Medical Expenses Are Not Tax Deductible?
Examples of non-tax-deductible medical expenses include funeral or burial expenses, nonprescription medicines, toothpaste, toiletries, cosmetics, and more.
Are Medical Premiums Tax Deductible?
For the 2020 and 2021 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 7.5% of your adjusted gross income (AGI).
What Is a Qualified Medical Expense?
A qualified medical expense is generally one that can also be deducted as a medical expense on a yearly income tax return, such as doctors' visits, lab tests, and hospital stays.
Is it Worth Claiming Medical Expenses on Taxes?
Yes, it is worth claiming medical expense deductions on taxes if your qualified medical expenses exceed 7.5% of your adjusted gross income.
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 7.5% 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).