- Find out the amount of medical expenses you may claim as itemized deductions.
- Learn how to avoid AGI limitations while allowing deductions without itemizing.
- Find out what insurance is deductible.
- Learn about above-the-line deductions for the self-employed.
- Find out more about income limitations.
- Learn about subsidized health insurance limitations.
Health insurance premiums, especially in the wake of the Affordable Care Act, have risen dramatically. They constitute one of the greatest expenses that most individuals pay. Although the cost of health insurance is allowed as part of an individual’s medical deductions when itemizing deductions, only the amount of total medical expenses that exceeds 7.5% of the taxpayer’s adjusted gross income (AGI) count as deductible. However, the 7.5% limitation increases to 10% for years after 2020.
Fiducial wants you to know that you may include insurance as a medical deduction. We also want you to know of an alternate means of deducting health insurance for certain self-employed individuals. This means avoids the AGI limitation and allows for deductions without itemizing.
Deductible health insurance
Let’s start by looking at what the IRS considers deductible health insurance. It includes the premiums paid for coverage for yourself, your dependents, and your spouse for the following types of plans:
- Health care and hospitalization insurance
- Long-term care insurance (limited based on age)
- Medicare A in some circumstances*
- Dental insurance
- Medicare B
- Vision insurance
- Medicare C (aka Medicare Advantage plans)
- Medicare D
- Premiums paid through a healthcare marketplace net of the Premium Tax Credit
*Most workers, and government employees who pay Medicare tax, have a portion of their wages deducted for contributions to Medicare A. This payroll tax isn’t a deductible medical expense. However, those not covered under Social Security, and government employees who didn’t pay Medicare tax, can voluntarily enroll in Medicare A. In that case, the Medicare A premiums count as a medical expense.
Premiums paid on your or your family’s behalf by your employer do not count as deductible because your wage income does not include their cost. Or, if you pay premiums for coverage under your employer’s health insurance plan through a “cafeteria” plan, you may not deduct those premiums either because you pay them with pre-tax dollars.
Special Rule for Self-Employed Taxpayers
If you are a self-employed individual, you can deduct 100% (no AGI reduction) of the premiums paid on behalf of yourself, your spouse, your dependents, and your children. (Note: Children must be under age 27 at the end of the year without itemizing your deductions.) This above-the-line deduction is limited to your net profits from self-employment, less the deductible part of your SE tax and contributions to SEP, SIMPLE and qualified retirement plans.
No above-the-line deduction is permitted for any month when the self-employed individual is eligible to participate in a subsidized health plan maintained by an employer of the taxpayer, the taxpayer’s spouse, any dependent, or any child of the taxpayer who has not attained age 27 as of the end of the tax year.
The plan qualifies as subsidized when the employer pays 50% or more of the premium. This rule applies separately to plans that provide coverage for long-term care services. Thus, if you are a self-employed individual eligible for employer-subsidized health insurance, you may still be able to deduct long-term care insurance premiums as long as you aren’t eligible for employer-subsidized long-term care insurance.
Partner health insurance
If you are a partner who performs services in the capacity of a partner and the partnership pays health insurance premiums on your behalf, those premiums are treated as guaranteed payments deductible by the partnership. They are also includible in your gross income. In turn, you may deduct the cost of the premiums as an above-the-line deduction under the rules we’ve discussed in this article.
This above-the-line deduction is also available to more-than-2% S corporation shareholders. For purposes of income limitation, the shareholder’s wages from the S corporation are treated as his or her earned income.
Do you have questions related to deducting health insurance premiums, whether as an itemized deduction or an above-the-line deduction for self-employed individuals? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations.