As of 2021, more than 90% of the United States population had some type of health insurance. The majority of people have private health insurance through their employer, while others have coverage through their spouse, their state’s insurance marketplace, or through a government-sponsored program, like Medicare.
Health insurance is no longer legally required at the federal level, but in many states, going without insurance comes with consequences, like tax penalties. For many Americans, their health insurance premium is one of their biggest monthly expenses. This begs the question of whether it’s possible to deduct health insurance premiums from your taxes.
The short answer is—health insurance premiums can be tax-deductible, but it’s more complicated than that. It depends on where you get your health insurance, the type of medical bills you’ve incurred, and how much they cost.
In this article, we’re going to explain how health insurance premium tax deductions work, what expenses can and can’t be deducted, and how you can lower your taxable income.
Who Qualifies For Medical-Expense Tax Deductions
Anyone who has health insurance can potentially deduct some healthcare costs from their taxes. If you have dependents on your health insurance policy, like children under age 26, you can also deduct some of their expenses from your taxes.
However, not many people can write off the entirety of their health insurance premium. One group that falls into this category are individuals who have private health insurance and qualify for premium tax credits, which is based on income.
The IRS states that to qualify for a premium tax credit, your household income must be at least 100% and no more than 400% of the federal poverty line for your family size. There are other eligibility criteria based on your marital status, your state, and the number of dependents you have.
The other group that can deduct their insurance premiums is self-employed individuals. People who are self-employed and can’t get insurance through an employer or spouse are allowed to deduct 100% of their private health insurance premium.
While the average person probably can’t deduct their entire health insurance premium, certain medical expenses can be deducted from your federal income taxes. Next, we’ll go over the general guidelines for tax deductible medical expenses.
Deductions for Qualified Unreimbursed Healthcare Expenses
Depending on your health insurance plan, your insurance company might reimburse the full cost of your medical services, while others require you to pay for a portion of the cost. Every insurance plan covers different services, and many have a deductible or co-pay.
So, how are you allowed to deduct qualified unreimbursed medical expenses?
The general rule is that, if your medical bills for the tax year exceed 7.5% of your adjusted gross income, they can be written off. Adjusted gross income is your taxable income, which includes your annual income minus deductions, like charitable donations or certain business expenses.
Some examples of healthcare costs that can be written off include:
- Diagnostic screenings
- Service animals
- Home care
- Medical equipment, like a wheelchair
- Transportation to and from medical appointments
Here’s an example. Let’s say that your adjusted gross income was $150,000. In this case, you would be able to deduct $11,250 of medical bills, which is 7.5% of $150,000. If your adjusted gross income was $50,000 per year, you would be allowed to deduct $3,750.
As long as your medical expenses are greater than 7.5% of your adjusted gross income, they can be deducted from your taxes. However, you aren’t allowed to deduct out-of-pocket costs, like your deductible or co-pay. And if you have coverage through your employer, you can’t write off the portion of your premium that your employer pays.
Standard Deduction vs. Itemized
Before you decide to deduct qualifying medical expenses from your income tax, it’s important to decide which method is right for you. When you file your income taxes, you have two options for deductions. You can take the standard deduction (the most common option) or the itemized deduction.
The standard deduction is a set dollar amount which automatically lowers your taxable income. For tax year 2020, the standard deduction for single filers was $12,400, for heads of households, the standard deduction was $18,650, and for married couples filing jointly, the standard deduction was $24,800.
The itemized deduction, on the other hand, is a number that you calculate by adding up your personal deductions and subtracting that number from your taxable income. It requires you to keep a careful record of expenses and receipts, because the IRS may request to verify your deductions if you were to get audited.
Here’s the takeaway—if you have accrued large medical bills totalling more than 7.5% of your adjusted gross income, you may be better off choosing the itemized deduction. But if the total cost of your medical bills for the taxable year doesn’t exceed the standard deduction, that’s probably the option you should choose.
What Can I Not Deduct from My Taxes?
Not all health insurance costs can be deducted from your taxes. Here are some of the things that don’t qualify for a deduction:
- Most cosmetic procedures
- Funeral expenses
- Over the counter medications
- Nicotine gum
Another thing to keep in mind is that, when you calculate your medical expenses, you can only deduct the amount spent on covered services. So, for example, if you underwent chemotherapy, that could be fully deducted, assuming the cost was greater than 7.5% of your income. But if you also got elective plastic surgery that year, the cost of the cosmetic procedure wouldn’t count towards the 7.5%.
Other Ways to Lower Your Tax Bill
Deducting your health insurance premiums and medical expenses isn’t the only way to lower your taxable income. Here are some other suggestions for reducing the amount of money you owe in federal income taxes:
- Contribute to a retirement account: Any money that you deposit into a SEP IRA or a traditional IRA during the taxable year can be written off your taxes.
- Give to charity: If you donate money to charitable organizations, that money can be written off your taxes (up to a certain amount).
- Fund an HSA or FSA: Consider making contributions to your Health Savings Account (HSA) or Flexible Spending Account (FSA) to lower your taxable income.
- Sell underperforming stocks: If you have investments that are causing you to lose money, consider selling them to offset the capital gains tax.
Get an Earned Income Tax Credit: Depending on your income level, you may qualify for an Earned Income Tax Credit (EITC), which can lower your taxable income. There are also other tax credits if you have children.