Is health insurance tax deductible? This is a simple question with a complicated answer. The more you know about the rules that apply, the more you can save, whether you are part of an employer-sponsored plan or self-employed.
In this article, I’ll give you a detailed look at when and how you can get a tax deduction on your health insurance, together with simple examples. This will make it much easier for you to understand, especially if you know very little about this topic.
I divided the types and ways to get deductible into two groups: self-employed individuals and individuals who belong to an employer-subsidized health plan. These groups have their limitations as well, so keep on reading to find out more.
When Is A Medical Insurance Tax Deductible?
There is a significant difference between getting tax deductibles as a self-employed person and a person who is employed by another individual. That’s why I wanted to share the most important details with you so you know when you can claim deductions.
If You Are Self-Employed
If you are self-employed, you might be eligible to write-off your health insurance premium. There is a chance that you can entirely deduct your premium payments. However, it all depends on several factors; it is not available for everyone and has certain limitations.
This is a write-off that you enter on Schedule 1 of Form 1040, no matter whether you itemize your deductions or not. An itemized deduction is the amount of money you spent on eligible services or products during the tax year that can be taken away from your adjusted gross income. This is a way in which you can lower your tax bill.
The tax deduction should not be higher than the amount you’ve earned from your self-employment. If you did not have a positive income during the tax year, then you will not be able to claim a deductible, although you’re self-employed.
Something you have to remember is that your tax deductible is determined every single month. If your status changes, or you become a part of your wife’s or husband’s employer-subsidized plan, then you will not be eligible for this anymore.
But, if you haven’t been a part of another employer-sponsored plan, or you have been single in the past month, and you are self-employed, then you probably can ask for a deduction on the health premiums you paid for.
Since the situation is reviewed month by month, this is another example that might be similar to yours. If you were a part of an employer-sponsored plan for a few months of the year, those are the months when you can’t claim a tax deduction on your health insurance premiums.
However, suppose you lost or left that job and started freelancing in the following months, without being a part of an employer-subsidized plan. In that case, there is a strong chance you can get a deduction on the premiums for the months when you worked as a freelancer.
Self-employed individuals who also have another job cannot get this deduction. In other words, if you have your own business but also work at another job, this does not apply to you.
If you receive coverage as a part of your wife’s or husband’s employer-sponsored plan, then you’re not eligible to get a health insurance premium deduction.
As I mentioned before, another limitation is you not having a positive income for your business during the tax year. The deduction cannot be higher than the amount that you’re claiming you’ve earned.
Individuals who own more than one business can only choose a single health insurance plan and assign it to one of the businesses. They can’t combine the income from the companies and ask for higher deductibles.
Members and partners of an LLC belong to the self-employed group. The LLC can deduct the health insurance costs for their non-LLC member employees.
LLC members, on the other hand, in some cases can and in other cases can’t get a tax deduction on healthcare insurance. They can usually deduct it as a business expense, but it still depends on the plan they have and which route they’ll choose.
If You’re Not Self-Employed
Are medical insurance premiums tax deductible for individuals who fall under an employer-sponsored plan? This is also a complicated answer and mostly depends on the plan your employer has chosen, as well as your personal choices.
The chances are that the plan your employer has chosen includes health premiums that are already tax-free. Most employers opt for plans that get money for premiums out of your paycheck before the income taxes are calculated. In other words, these are premiums covered with pre-tax money, and they’re not tax deductible.
Another option is for your employer to cover a part of your premiums, and you cover the rest. Although you can’t claim a deduction on the amount your employer covers, you can claim for the part you pay for.
If your total healthcare costs during the tax year were high, you might be eligible to claim a deduction.
Are your health insurance premiums tax deductible if someone else paid for them? No, they aren’t. If someone else paid for the premiums, whether that is the government or an employer, you can’t get a tax deduction.
In cases when you pay for your own premiums and you do itemize your deductions, you could also possibly get a deductible on the premiums. This refers to individuals who are not self-employed and pay the premiums using after-tax money.
Is Health Insurance A Business Expense?
Yes, health insurance can be deducted as a business expense but only by companies who have a group health insurance plan for their employees. They can claim health insurance as a business expense. However, this is not the case for self-employed individuals.
Although individuals can get a health insurance premium deduction in most cases, they cannot write-off health insurance as a business expense because they don’t pay for business taxes.
If you have your own business, then you can get a deduction on the health insurance costs as a business expense for your employees. The exclusion to this case is if you are an employee in your business.
Self-employed individuals pay for their own health insurance plan, meaning they become eligible for a tax deduction. There is a way they can turn health insurance into a business expense using a straightforward trick.
The easiest way to enjoy this benefit is if you hire your wife or husband in your company. The health insurance plan will be in their name, instead of being on your name. That’s how you’ll get a plan that covers your entire family, including the spouse and the kids.
This method covers kids that are younger than 27 years, no matter if they rely on you as a source of income or not.
Here’s a great example of how this works. You start by hiring your husband as your assistant and pay him $30,000 per year. The health insurance plan is in his name and the premiums each year cost $12,000.
This plan will also cover your kids if they are younger than 27.
Next, you can get a deductible on the $12,000 as a business expense since the health insurance policy is not in your name. Your entire family is covered with health insurance. It’s a much better alternative compared to getting a tax deduction as a self-employed individual.
Is It Better To Have Health Insurance Deducted Before Or After Taxes?
If you’re not quite sure what to do, here’s a short explanation.
If you pay your health premiums with after-tax money, you pay from the amount that is left on your paycheck after you’ve paid taxes. This happens if your employer has a health insurance plan that offers only an after-tax premium deductible and you want to be a part of it. It can also happen if your employer has a pre-tax plan, but you don’t want to be a part of it and want to opt for the after-taxes option.
You can deduct your medical expenses if you’ve paid them with after-tax earnings.
With the after-tax plan, you might need to purchase medical insurance on your own for medical coverage. This is a type of coverage you can drop whenever you want to, and you can switch to another plan. That is the main reason why people choose it.
If you pay your premiums with pre-tax money, the premium will be deducted from your pay before your payroll or income taxes. These health insurance deductibles can also be a part of the employer-sponsored plan you have. You can’t deduct health premiums if they were paid with your pre-tax earnings.
For this plan, you need to pay attention to open enrollment, which is the time of the year when you sign up for a health insurance plan.
The Final Verdict
There is no straight answer to whether you can get a tax deduction on your health insurance or not. As I mentioned before, there are various factors that influence this answer, especially your form of employment.
In general, self-employed individuals pay for their own health insurance plan and can get a tax deduction on it. Individuals who are under an employer-sponsored plan can’t get a deduction if the health premiums are paid with pre-tax money, but they are eligible to get a deduction in some cases when the premiums are paid with after-tax money.
Is your medical insurance tax-deductible? Why or why not? Please share with us in the comments section below.