Is Health Insurance Tax Deductible?

In the United States, a health insurance deduction applies only to expenses uncompensated by insurance, regardless of whether you have received monetary reimbursement directly or payment made on your behalf to a doctor, hospital, or any other medical provider. Generally, if you pay for medical insurance on your own, you can deduct the amount from your taxes. Your income and how you get your insurance help determine whether the costs are eligible for tax deductions.

Health insurance is one of the best ways to overcome such financial crises. Health insurance is essential because it helps to lower medical costs, making health care more affordable and thus more accessible. It also facilitates access to care, reducing death rates and improving health care outcomes. Health insurance covers essential health benefits critical to maintaining health and treating illness and accidents.

However, the parameters of how to apply for health insurance-related tax deductions can be confusing. Often, the primary points of confusion are what qualifies as a medical expense and whether your plan's health insurance premiums permit deductions. Whatever your circumstance, health insurance covers unanticipated medical costs and hospital bills in dire situations. This article will clarify the conditions for individuals to qualify for a tax deduction on their health insurance premiums and the necessary steps to take to file.  

Tax Deductibility of Health Insurance Premiums

Health insurance premiums can be tax-deductible under some circumstances. The IRS defines deductible medical expenses as those related to the diagnosis, cure, mitigation, and treatment affecting your bodily function or overall health. A medical expense must generally be considered legal and meet IRS conditions to be tax deductible.  

Taxpayers who itemize can utilize this deduction to the extent that their total medical and dental expenses, including health insurance premiums, exceed 7.5% of their adjusted gross income. Everyday medical expenses, such as appointments, surgeries, diagnostics, prescription drugs, and equipment like wheelchairs and home care, are eligible for deductions from your taxes. 

Eligibility criteria for tax-deductible health insurance

Individual coverage vs. employer-sponsored plans

Your employer chooses the sponsored health insurance you receive. Your employer chooses the insurance company and selects your plan options. Generally, your employer shares the cost of your premiums. 

If you're self-employed and have a net profit for the year, you may be eligible for the self-employed health insurance deduction. Generally, this looks like an adjustment to your total cost, rather than an itemized deduction, for the premiums you paid on a health insurance policy covering medical care. If you don't claim 100% of your paid premiums, you can include the remaining amount with your other medical expenses as an itemized deduction on Schedule A (Form 1040). Generally, self-employed individuals qualify for tax deductions regarding health insurance if they:

• Itemize your deductions rather than take the standard deduction you pay your health insurance premiums directly

• Your expenses totaled more than 7.5% of your income for the year.

• You are within certain household income limits. 

Other Tax Benefits Associated With Health Insurance

Health Savings Accounts (HSAs)

A Health Savings Account (HSA) is a tax-advantaged account (a type of investment, financial account, or savings plan that offers tax benefits) created for or by individuals covered under high-deductible health plans (A plan with a higher deductible plan with a low monthly premium, but you pay more health care costs yourself before the insurance company pays or reimburse). 

Contributions to your HSA account pay for qualified medical expenses, such as medical, dental, and vision care and prescription drugs. You can only contribute money to an HSA if you have an HDHP. The maximum HSA contribution for the 2023 tax year is currently $3,850 for individuals.

Flexible Spending Accounts (FSAs)

1. Tax benefits of contributing to an FSA

A Flexible Spending Account (FSA) is an account you put money into that you use to pay for certain out-of-pocket health care costs. If you have health insurance through your job, you can use an FSA to pay for your health care costs, like deductibles, copayments, coinsurance, and some prescription medications. With an FSA, you submit a claim to your employer with proof of the medical expense and a statement that it hasn't been covered by your plan. 

FSA can also lower your taxes. You don’t pay taxes on this money, meaning you’ll save an amount equal to the taxes you would have paid on the money you set aside. Employers may make contributions to your FSA, but they aren’t required to.

2. Qualified medical expenses covered by FSAs

You can use the allocated funds in your FSA to pay for certain medical and dental expenses, like deductibles and copayments, but not for insurance premiums. Medical and dental expenses include funds for prescription medications, over-the-counter medicines with a doctor's prescriptions, and reimbursements for insulin. FSAs may also be used to cover medical equipment costs like crutches, supplies like bandages, and diagnostic devices like blood sugar test kits.

Premium tax credits under the Affordable Care Act (ACA)

According to the IRS, The premium tax credit (PTC)  is a reimbursement that assists eligible individuals in covering the cost of premiums for their health insurance. However, you must meet specific requirements and file a tax return with Form 8962. To qualify for a PTC under the Affordable Care Act (ACA), you must:

• Have health insurance through the exchange/marketplace (purchased through a state or federal exchange at Healthcare.gov). 

• Household income must be at least 100 percent and, for years other than 2021 and 2022, no more than 400 percent of the federal poverty line for your family size. However, two exceptions exist for individuals with household incomes below 100 percent of the national poverty line. 

How to claim premium tax credits when filing taxes

There are two ways to get the credit. Suppose you qualify for the premium tax credit (APTC) advance payments. In that case, you can choose to have amounts paid directly to the insurance provider to help cover your monthly premiums, or you can get the total amount when you claim the PTC on your tax return.

Employer-Sponsored Health Insurance and Tax Implications

Employer-sponsored premiums for health insurance are exempt from federal income and payroll taxes. If you have health insurance through your employer, you cannot claim what you pay toward premiums, as that amount is deducted from your check on a pretax basis.

1. Employee contributions and pretax deductions

An employer-sponsored health plan like a  401(k) plan allows an employee to elect to have their employer contribute a portion of their wages to an account under the plan. Payroll deductions are generally processed each pay period based on the applicable tax laws and withholding information supplied by your employees or a court order.

2. Taxation of employer contributions

If you and your employer have an agreement that your employer pays you for your health insurance taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return.

Reporting Health Insurance on Tax Returns

Depending upon your specific circumstances, the Health Insurance Marketplace, health coverage providers, and certain employers provide information forms to you to accurately report health coverage information when you file your individual income tax return. Your health insurance providers, employers, and the Marketplace will also file these forms with the IRS.

Understanding IRS Form 1095

Form 1095-A is an IRS form for folks who obtained their health insurance through the Health Insurance Marketplace. You will automatically receive your Form 1095 from your insurance provider electronically or in print. Form 1095 is proof of health insurance, provides an in-depth summary of your medical billing history, and is indispensable for federal tax filing. The form includes detailed information about your insurance plan, such as coverage dates and the amount of any premium tax credit you received.

Form 1095 A

The 1095-A form, also known as the ‘Health Insurance Marketplace Statement,’ is for folks who purchased health insurance through the Health Insurance Marketplace, also known as the exchange. You’ll use Form 1095-A to complete another document, Form 8962, Premium Tax Credit. The premium tax credit (PTC) is a refundable credit that helps cover health insurance premiums purchased through the Marketplace. Form 1095-A will allow you to reimburse your PTC debts. 

Form 1095 B and C

If you obtained your health insurance independently during any part of 2023, you should receive Form 1095-B from the insurance provider. These forms are informational and are for your records only. There is no action required at your end, and the form is not required in order for you to file your personal income tax return. 

Form 1095-C is a tax form that provides you with information about employer-sponsored health insurance. Only employees who are offered coverage under a policy through an Applicable Large Employer (ALE) receive Forms 1095-C, and it is the responsibility of the ALE to circulate the documents to all employees who were full-time (as defined by the ACA) for one or more months of the year.

Common Tax Deduction Mistakes and Misconceptions

The following are the most common errors folks encounter when they are claiming health insurance deductions on their taxes that result in errors or rejections. It is advised that you seek out the advice of a tax professional before submitting your claims. 

Reaching the income threshold for expenses

Health insurance costs may be tax-deductible, but it depends on how much you spent on medical care for the year and whether you're self-employed. You can only deduct expenses if you exceed 7.5% of your AGI and choose to itemize your deductions. You can't remove the amount paid for by a health plan or employer.

Incorrectly deducting non-deductible expenses

Before you submit your taxes, be sure that the medical expenses are eligible for deduction according to your premium plan. The following are expenses typically considered non-deductible by the IRS:

• Funeral or burial expenses.

• Amounts paid for nonprescription medicines.

• Amounts paid for toothpaste, toiletries, or cosmetics.

• Amounts paid for a trip or program for the general improvement of your health.

• Amounts paid for most cosmetic surgery.

• Amounts paid for nicotine products like patches that don't require a prescription. 

Failing to report employer contributions or medical expenses accurately

In general, the amount reported should include both the portion paid by the employer and the portion paid by the employee. If you purchased your insurance through the Marketplace, you must provide a full scope of your medical expenses for the past year and select the ones that qualify for the deduction. Your claim will be denied if you fail to report these expenses accurately. 

Missing identification information

If your tax or medical documentation is missing any pertinent biological or biographical information relevant to the IRS or your provider, this can result in a denied claim.  

Frequently Asked Questions

 The following are the most common questions related to health insurance tax deductions. 

• Can I deduct health insurance premiums for my family?
• What if I have multiple health insurance plans?
• Are long-term care insurance premiums tax-deductible?

How To Find a Good Health Insurance Agency

Because health insurance can be confusing, getting help from a professional insurance agent may help you select a health insurance plan that fits your needs and budget. At Expertise, we are dedicated to connecting folks with the services they need. Please click here to view Expertise.com’s directory of accredited Insurance providers and tax experts through our concierge service.