What medical insurance premiums are tax deductible

Being able to claim a tax deduction for the cost of health insurance depends on several factors. Whether you're an employee or a self-employed individual, or if you paid for your insurance using pre-tax or after-tax dollars will both have an impact on what you can claim. It can also depend on whether you take the standard deduction on your tax return or you itemize. 

Key Takeaways

• Employees benefit when health insurance premiums are deducted from their pay before taxes are withheld from the balance without any of the limitations associated with claiming an itemized deduction.
• Self-employed persons can deduct health insurance "above the line" as an adjustment to income by filing Schedule 1 with their tax returns. This also eliminates the hassle and limitations of itemizing.
• Other taxpayers can deduct the cost of health insurance as an itemized deduction to the extent that their overall medical and dental expenses exceed 7.5% of their adjusted gross incomes.

The Medical Expense Deduction

Health insurance costs are included among expenses that are eligible for the medical expense deduction. You must itemize to claim this deduction, and it’s limited to the total amount of your overall costs that exceed 7.5% of your adjusted gross income (AGI) as of the 2021 tax year. This is the tax return you'd file in 2022.

This threshold was 7.5% until 2013 when it increased to 10%, although it remained at 7.5% for taxpayers who were age 65 or older, at least for a little while. Then, as of Dec. 31, 2016, all taxpayers had to meet the 10% threshold to be able to claim this deduction, regardless of their age.

The 2017 Tax Revision (P.L. 115-97) restored the threshold to 7.5% retroactively for 2017 and going forward through 2018. It was slated to hike back up to 10% in 2019, but then the Taxpayer Certainty and Disaster Tax Relief Acts of 2019 and 2020 extended the 7.5% threshold indefinitely.

How To Apply the Percentage Threshold

The 7.5% rule can be disadvantageous mathematically unless you have significant other medical expenses in addition to your insurance premiums. You can include these other expenses in the deduction to help you get over the 7.5% threshold.

As an example, you could not deduct your premiums in 2021 if your AGI was $60,000 and you paid $4,500 in health insurance premiums over the course of the tax year because 7.5% of your AGI works out to $4,500. You didn’t pay anything in excess of $4,500 so you have no deduction.

But you’ve spent a cumulative total of $7,500 if you additionally paid $3,000 in uninsured medical expenses. This is $3,000 more than your 7.5% threshold, so you can claim that $3,000 as an itemized tax deduction. 

The Threshold Doesn't Apply to All Your Income

The good news is that this percentage doesn't apply to your total gross income but only to your AGI. This is the number that's arrived at after you've taken certain above-the-line deductions on Schedule 1 of your Form 1040 tax return, reducing your gross income to your taxable income.

Note

Your AGI appears on line 11 of your 2021 Form 1040 before you subtract your itemized deductions or the standard deduction for your filing status on line 12.

Above-the-line deductions include things like certain retirement plan contributions, tuition, and student loan interest. Your AGI will typically be less than your overall income if you can claim any of these deductions. For example, you might have earned $60,000, but your AGI would be just $54,000 if you contributed $6,000 to your IRA in that year. Your 7.5% threshold would drop from $4,500 to $4,050 in our example. 

Tax Deduction vs. Pre-Tax Pay Deduction

Employees who pay for health insurance with pre-tax dollars through payroll deductions aren’t eligible to take a further deduction for these same expenses. Check your pay stubs if you’re unsure how you’re paying for insurance that's available through your employer. You're using pre-tax dollars if the deductions are made before your employer calculates your tax withholding on the balance.

Note

Paying for health insurance as a pre-tax pay deduction can be more advantageous and may well save you more money than taking the itemized deduction for medical expenses.

Pre-tax health benefits reduce your taxable income. The income tax, Social Security tax, and Medicare tax that you must pay are all percentages of your taxable income.

If You’re Self-Employed

Self-employed persons can take a deduction for health insurance premiums they pay for themselves and their dependents on line 17 of the 2021 Schedule 1 form. This is another above-the-line adjustment to income. You can then transfer the total of Part 2 of Schedule 1 to your tax return.

This is one of those deductions that can reduce your AGI from the total of your gross income, and you don't have to itemize your deductions to take it. It's not limited by the 7.5%-of-AGI rule, either. You can claim up to 100% of what you spent on premiums if you're self-employed, but the deduction is limited to no more than your net self-employment income.

But any premiums beyond your net self-employment income can be claimed as an itemized deduction, along with any other out-of-pocket medical expenses.

Frequently Asked Questions (FAQs)

What types of costs are included in the medical expense deduction?

The IRS allows for the deduction of any medical or dental expenses for you, your spouse, or your dependents. These could include costs related to seeing a doctor, getting a pair of glasses, transportation to essential care, and the premiums you pay for health care.

How do you claim deductions for health insurance premiums on your tax return?

Medical expense deductions, including any deductions for insurance premiums, are made on Schedule A of IRS Form 1040. Schedule A includes numerous other deductions as well, so itemizing can be a good deal if the total of all these deductions exceeds the standard deduction that you're entitled to claim for your filing status. Otherwise, you'd be paying taxes on more income than you have to if you itemized instead.

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