A medical pre-tax deduction allows employees to pay health insurance premiums before taxes, reducing taxable income. Self-employed individuals may deduct premiums if not eligible for employer-sponsored coverage, with additional rules for health savings accounts and itemized medical expenses.
By Brad Nakase, Attorney
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You might be asking whether you can deduct the cost of your health insurance when tax time comes around. Maybe; it depends on a lot of things including your income, if you’re self-employed, how much you spend on healthcare (including premiums), and whether you itemize your deductions.
Health insurance premium tax deductions are complicated, and the regulations vary for self-employed people and those with high medical expenses. This article will walk you through the process.
Employers cover a portion of the cost (often the majority) and employees cover the remaining amount. This arrangement ensures that most Americans under the age of 65 have health insurance.
Many employers take pre-tax payments from employees’ paychecks for their health insurance premiums. (Please be aware that this does not apply to domestic partner benefits. If a company permits its employees to include their domestic partners in the group health plan, the premiums paid by the partner are not pre-tax, and the worth of their insurance is treated as taxable income.)
For the simple reason that you can’t engage in “double-dipping” on your tax return, you can’t claim health insurance premiums that you paid for with pre-tax dollars.
Most Americans who aren’t in retirement don’t claim their health insurance premiums as a tax deduction since they pay for them throughout the year with pre-tax cash. However, things get trickier for those who want to purchase their own health insurance.
Premiums paid for health insurance for you and your dependents can likely be claimed as a tax deduction if you’re self-employed. This holds true if you are self-employed and not qualified to enroll in a health plan that is supported by your spouse’s workplace or your own employer (if you have several jobs).
This is the case whether you purchase your health insurance via your state’s exchange or marketplace or through an individual market outside of the exchange. Only participants on the exchange are eligible for premium subsidies, often known as premium tax credits.
In any case, the only amount that self-employed people may deduct for premiums is the amount that they actually pay. You may only claim the premium amount you paid after receiving a subsidy on the exchange as a tax deduction, since there is no possibility to “double-dip” on this matter.
You should know that your adjusted gross income (as calculated specifically for the Affordable Care Act, and not for general purposes) is a factor in the amount of premium subsidies you will get. Nevertheless, as a self-employed individual, your health insurance premiums do contribute to your modified adjusted gross income.
It becomes a vicious cycle: your premium subsidy is based on your adjusted income, which is in turn based on your adjusted income. You can have this sorted out with the aid of your tax advisor or tax software; the IRS has already taken care of it.
In Form 7206, the IRS makes it clear that self-employed individuals who are eligible for employer-subsidized health coverage, whether it be their own or their spouse’s, cannot deduct the premiums for their individual health insurance plans, regardless of whether they have declined the subsidy and opted to purchase their own plan.
You may not be able to deduct the premiums you pay for employer-sponsored health insurance, regardless of whether you are self-employed. This is true regardless of whether the plan is through your own employer, a separate job, your parents’ plan, or another employer’s plan. This is because pre-tax money is probably already being used to pay them.
You are eligible to make contributions to a health savings account (HSA) if your high deductible health plan (HDHP) is an HSA-qualified plan. While you may get a high-deductible health plan (HDHP) via your company or buy one on the individual market, you can also set up your health savings account (HSA) independently.
Contributions to your health savings account (HSA) are fully deductible up to a maximum of $4,150 in 2024 for single-person coverage and $8,300 for families with two or more people.
Limits of $4,300 and $8,550 will be in effect in 2025, respectively.
You or your employer can put money into your health savings account (HSA), but you can only claim a tax deduction for the amount you put in yourself. When you pay into your health savings account (HSA) using payroll deductions, the money goes in before taxes, which shows up on your W-2.
Your taxable income will already include such costs; you may think of it like paying for employer-sponsored health insurance using pre-tax dollars; you won’t be able to deduct them from your return.
You are probably already paying your premiums on a pre-tax basis if you get your HDHP via your employer. In such instance, you cannot claim the premiums as a tax deduction, as is the case with all other forms of health insurance, because the funds utilized to cover them were never subject to taxes.
If you choose to pay for your health savings account (HSA) out of pocket, you’ll need to keep track of your contributions throughout the year and include the total as a tax deduction. However, if your HSA administrator does this for you, they’ll use Form 5498-SA to submit this information to both you and the IRS.
If you’re self-employed, you can deduct the premiums you pay for your HDHP as you would for any other health insurance. On the other hand, if you itemize your deductions and your medical expenditures are large enough, you can deduct them as part of your overall medical expenses, as explained in the following section.
Neither your employer-sponsored health insurance premiums nor your health savings account contributions will be deductible if you have an HDHP via your job and contribute to your HSA through payroll deduction, as the majority of individuals do. Your paycheck is likely to have the premiums and contributions deducted before taxes. Your employer can verify this for you.
You can include self-paid dental and medical insurance premiums (and, with certain restrictions, coverage for long-term care) as part of your taxable medical costs according to the Internal Revenue Service (IRS).
These costs add up to the 7.5% of your adjusted gross income (AGI) that you have to spend on health care before you can subtract any out-of-pocket medical costs. They also add to costs that are higher than this amount.
For a short period of time between 2013 and 2016, the medical cost deduction level was 10% instead of 7.5%. However, starting in 2017, Congress lowered the threshold to 7.5%, and that amount was permanently fixed at 7.5% in the Consolidated Appropriations Act of 2021.
You can include a variety of health-related costs in your overall medical expenses, such as:
There is a full list available on the IRS website.
For those who aren’t self-employed and paying for their own health insurance (and so not eligible for the deduction for self-employment health insurance), it’s important to keep track of all of their out-of-pocket spending throughout the year. If you want to itemize your deductions (more on that later), you can deduct the expenditures that are more than 7.5% of your AGI.
In 2024, you may deduct $4,250 worth of medical expenditures if your adjusted gross income is $50,000 and you spend $8,000 on healthcare. This amount includes your health insurance premiums, which you pay out of pocket and aren’t eligible to claim as a tax deduction. You would be entitled to deduct the amount that exceeds $3,750, which amounts to $4,250, as 7.5% of $50,000 equals $3,750.
You must itemize your deductions in order to claim medical costs as a deduction. This is in contrast to the two cases mentioned before, where you may take advantage of the Health Savings Account deduction and the self-employed health insurance premium deduction, even if you don’t itemize your deductions.
Basically, this is how the Internal Revenue Service handles premiums for health insurance. Consult a tax professional if you need help understanding your own situation.
The 2017 tax reform law that raised the standard deduction is known as the Tax Cuts and Jobs Act. You should keep track of your medical costs and compare the standard and itemized deductions when filing your taxes; nevertheless, this flat amount is $14,600 for single filers and $29,200 for married couples in 2024. It is the best alternative for the majority of tax filers.
People are less likely to itemize medical costs now that the standard deduction amounts are larger. However, itemizing may be the better choice if your overall itemized deductions (including medical expenditures that above 7.5% of your AGI) surpass the standard deduction. For assistance, talk to a tax professional.
It is common practice to pay health insurance premiums using pre-tax funds. Most people won’t even need to change their tax code to account for the pre-tax deduction for their employer-sponsored health insurance because of this.
Individuals who are self-employed and pay for their own health insurance can often claim a part of those premiums as a tax deduction. If you are not self-employed and pay for your own health insurance, you may be able to deduct some of your premiums. However, this is only applicable if you itemize your deductions and your total medical expenses are more than 7.5% of your income.
Remember that in order to qualify for premium tax credits, whether you’re paying for your insurance out of pocket or using them on your tax return, you must enroll in a plan via your state’s health insurance exchange. Consult a tax professional if you have any questions.
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