Health insurance premiums, especially in the light of the Affordable Care Act have risen dramatically. It is one of the largest expenses that most individuals pay. The cost of health insurance is allowed as part of an individual’s medical deductions when itemizing deductions. However, only the amount of total medical expenses that exceed 10% of the taxpayer’s adjusted gross income (AGI) is deductible. The 10% limitation is reduced to 7.5% through 2016 where a taxpayer or spouse (if any) is age 65 or over as of the end of the year. Prior to the increased limitation imposed by the Affordable Care Act, the limitation was 7.5% for everyone.
This article has two purposes:
- To remind you what insurance can be included as a medical deduction
- To inform you of an alternate means of deducting health insurance for certain self-employed individuals. A means that avoids the adjusted gross income limitation and allows for deduction without itemizing.
What is Deductible Health Insurance?
Let’s start by looking at what is treated as deductible health insurance. It includes the premiums you pay for coverage for yourself, your dependents, and your spouse, if applicable, for the following types of plans:
- Health Care and Hospitalization Insurance
- Long-Term Care Insurance (but limited based upon age)
- Medicare-C (aka Medicare Advantage Plans)
- Dental Insurance
- Vision Insurance
- Premiums Paid through a Government Marketplace net of the Premium Tax Credit
However, premiums paid on your or your family’s behalf by your employer are not deductible. This is because their cost is not included in your wage income. Or, if you pay premiums for coverage under your employer’s insurance plan through a “cafeteria” plan, those premiums are not deductible either because they are paid with pre-tax dollars.
For the Self-Employed, in Accounting Terms:
If you are a self-employed individual, you can deduct 100% of the premiums without itemizing your deductions, excluding an AGI reduction. This is an above-the-line deduction. It is limited to your net profits from self-employment. 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. Meaning they are deductible by the partnership and are included in your gross income. In turn, you may deduct the cost of the premiums as an above-the-line deduction under the rules discussed in this article.
Here is when no above-the-line deduction is permitted. This is when the self-employed individual is eligible to participate in an employer subsidized health plan of the taxpayer, the taxpayer’s spouse, any dependent, or any child of the taxpayer who has not reached age 27 as of the end of the tax year.
Long-Term Care Insurance
This rule is applied separately to plans that provide coverage for long-term care services. Therefore, an individual eligible for employer-subsidized health insurance may still be able to deduct long-term care insurance premiums. This is as long as the person is not eligible for employer-subsidized long-term care insurance. In addition, to be treated as subsidized, 50% or more of the premium must be paid by the employer.
This above-the-line deduction is also available to more-than-2% S corporation shareholders. For purposes of the income limitation, the shareholder’s wages from the S corporation are treated as his or her earned income.
Health Insurance Tax Questions?
If you have any questions related to deducting health insurance premiums, either as an itemized deduction or an above-the-line deduction for self-employed individuals, call Alex Franch at 781.849.7200. Worthtax has a sign-on bonus of our own. In addition to our guaranteed pricing, we are giving $50 American Express gift cards to any new clients who have their taxes completed and filed by WorthTax. Worthtax provides ultra-convenient service and triple check accuracy. We have locations in Quincy, Weymouth and Dedham.