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Is Health Insurance Deductible on Taxes?
Whether health insurance is deductible on taxes depends on how you purchase it. If you purchase it through your employer, you likely paid for it with pre-tax dollars, making it ineligible for year-end deductions.
If you are self-employed, however, you can deduct health insurance premiums if your health insurance expenses exceed 7.5% of your adjusted gross income (AGI).
Medicare premiums aren’t tax-deductible
While Medicare premiums are generally tax-deductible, they are not pre-tax, meaning they are not deducted from your paycheck before it is taxed.
Consider an example: if an employee pays $250 a month for their employer-sponsored health insurance, they would pay $250 in taxes and not receive a deduction. But if that same employee earned $4,500, they could deduct $250 from their taxes if they paid the full amount in 2017.
The IRS does allow self-employed people to deduct Medicare premiums from their taxes, assuming they are profitably self-employed.
Self-employed individuals can be a sole proprietor, partner, limited liability company shareholder, or S corporation shareholder, and can own at least 2% of the company’s stock.
Self-employed people can deduct their Medicare premiums as itemized deductions, but the deductions don’t reduce their AGI. However, double-dipping is never allowed when it comes to taxes.
Despite this, there are some exceptions.
Premiums paid through a credit card are deductible only if they are paid during the year of the charge.
Premiums paid by a non-filing relative, or those reimbursed by their insurance provider, are not tax-deductible. However, flexible spending accounts are considered pre-tax.
In certain circumstances, you can deduct premiums for Medicare Part B from your taxes.
Group health insurance premiums are
When your employees are covered by a group health insurance plan, the employer pays the premiums, but the employee pays a portion of the premiums. Both the employer and the employee are eligible for tax deductions.
This tax benefit is different from individual health insurance, where the employee pays the entire premium.
Employee health insurance is a fringe benefit and has no dollar limit. Whether or not your employees are covered depends on the circumstances.
Depending on your state’s law, small businesses may be exempt from these requirements. However, even small businesses can qualify for a tax credit when they purchase group health insurance through the SHOP marketplace.
This tax credit allows small businesses to pay premiums with pre-tax dollars, reducing their payroll taxes. It’s important to understand all your tax options before you purchase health insurance.
Here are some examples of how your small business can benefit from this tax benefit:
You can deduct medical premiums on your tax return if your group offers coverage that allows you to use your employer’s health insurance plan.
Premiums paid for the plan by federal employees may be exempted if they are part of a premium conversion plan.
You can also deduct the entire premium as a medical expense if you qualify for an advance premium tax credit. If you receive $300 in APTC, you can deduct $200 of your premiums from your taxes.
The difference between the amount you receive from your APTC and your tax deduction is deducted from your refund and added to your balance.
Self-employed individuals can deduct health insurance premiums
In 1987, Congress introduced a new tax break that allowed self-employed individuals to deduct health insurance premiums. This tax break was made permanent in 1994 and, starting in 2003, became 100% deductible.
The deduction can be claimed on Schedule 1 of a self-employed individual’s personal income tax return. Self-employed health insurance premiums are deductible in proportion to the business owner’s adjusted gross income (AGI).
The deduction is limited to 75% of a self-employed taxpayer’s taxable income, but any expenses incurred for medical care are deductible.
Generally, self-employed people can deduct health insurance premiums they pay for themselves and their dependents.
In addition to health insurance premiums for themselves, self-employed individuals can also deduct the premiums for dependents, spouses, and children under 27.
This tax break can mean more money for you. However, many self-employed individuals are unsure of how the health insurance deduction works. Here are the details you need to know.
The IRS considers self-employed people to be self-employed if they report health insurance premiums as part of their business income on Schedule C or F.
This deduction is also available to limited partners and shareholders of S corporations.
If you work as a sole proprietor or are a limited partner, you must report your S corporation’s wages on your Form W-2.
Health insurance premiums paid by a spouse or non-dependent children are deductible, as long as you claim the expense as a business expense on your personal tax return.
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