Health insurance premiums can be a significant expense for many Americans. Fortunately, the United States government offers a tax deduction for those who pay their health insurance premiums out of pocket. This deduction can help reduce your tax burden and make health care more affordable. Today, you’ll learn how health insurance premiums are tax deductible in the United States.
First, it’s important to understand the difference between tax deductions and tax credits. Tax deductions reduce the amount of your taxable income, while tax credits directly reduce the amount of tax you owe. In other words, deductions help lower the amount of income that is subject to taxation, while credits lower your overall tax bill.
When it comes to health insurance premiums, they are typically tax deductible as a medical expense. Medical expenses that exceed a certain percentage of your adjusted gross income (AGI) are deductible. For the tax year 2022, the threshold for deducting medical expenses is 7.5% of your AGI. That means if your AGI is $50,000 and you have $4,000 in qualifying medical expenses, you can deduct $500 ($4,000 – $3,750).
It’s important to note that only the portion of your health insurance premium that you pay out of pocket is eligible for the deduction. If your employer pays a portion of your premium, that amount is not deductible. However, if you are self-employed and pay for your own health insurance, the entire premium is deductible.
In addition to health insurance premiums, other medical expenses that may be deductible include:
- Medical and dental expenses
- Prescription drugs
- Medical supplies and equipment
- Health savings account (HSA) contributions
- Long-term care insurance premiums
- Transportation expenses for medical purposes (e.g., to and from doctor’s appointments)
To claim the deduction for health insurance premiums, you’ll need to itemize your deductions on your tax return using Form 1040, Schedule A. Be sure to keep all of your receipts and documentation for medical expenses, as the IRS may ask for proof of your expenses.
It’s worth noting that the Tax Cuts and Jobs Act of 2017 (TCJA) temporarily lowered the threshold for deducting medical expenses to 7.5% of AGI for tax years 2017 and 2018. However, the threshold was set to increase to 10% of AGI in 2019 and later years. The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, made the 7.5% threshold permanent, which means it will remain in effect for tax years 2022 and beyond.
Another important consideration when it comes to deducting health insurance premiums is the Affordable Care Act (ACA). Under the ACA, individuals who do not have health insurance may be subject to a penalty, known as the individual mandate penalty. However, the penalty was effectively repealed in 2019, meaning that individuals are no longer required to have health insurance. Despite the repeal of the individual mandate penalty, the ACA still requires most individuals to have health insurance or pay a penalty, known as the shared responsibility payment. However, the shared responsibility payment is also set to be eliminated after tax year 2018.
Remember, it’s also important to note that the ability to deduct health insurance premiums and other medical expenses is subject to change based on tax laws and regulations, so it’s always a good idea to consult with a tax professional or the IRS for the most up-to-date information.
Important steps to take to benefit from the tax deduction for health insurance premiums
Determine if you are eligible for the deduction
To be eligible for the deduction, you must pay for your health insurance premiums out of your own pocket. If your employer pays a portion of your premium, that amount is not eligible for the deduction. If you are self-employed, you can deduct the entire premium.
Keep track of your medical expenses
In addition to health insurance premiums, other medical expenses that may be deductible include medical and dental expenses, prescription drugs, medical supplies and equipment, health savings account (HSA) contributions, long-term care insurance premiums, and transportation expenses for medical purposes. Be sure to keep all of your receipts and documentation for medical expenses.
Determine if your medical expenses exceed the threshold
For the tax year 2022, the threshold for deducting medical expenses is 7.5% of your adjusted gross income (AGI). If your medical expenses exceed this threshold, you may be able to deduct the amount that exceeds the threshold. For example, if your AGI is $50,000 and you have $5,000 in eligible medical expenses, you can only deduct the portion that exceeds $3,750 (7.5% of $50,000), which in this case would be $1,250. It’s important to note that the deduction for medical expenses, including health insurance premiums, is an itemized deduction, and you can only claim it if you choose to itemize your deductions rather than taking the standard deduction. The standard deduction for tax year 2022 is $12,950 for individuals and $25,900 for married couples filing jointly.
Itemize your deductions on your tax return
To claim the deduction for health insurance premiums and other medical expenses, you’ll need to itemize your deductions on your tax return using Form 1040, Schedule A. Be sure to include all eligible medical expenses.
File your tax return
Once you have completed your tax return, file it with the IRS by the deadline (usually April 15, but may vary based on holidays and weekends). If you are claiming the deduction for health insurance premiums, be sure to include Form 1040, Schedule A with your tax return.
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