Is Health Insurance Tax Deductible?

by | Apr 8, 2024 | Health Insurance, Health Sharing Programs, Heathsharing | 0 comments

If you own a business, or you’re self-employed or an independent contractor, health insurance premiums you pay for yourself and your family or for your employees are 100% tax deductible.

Is Health Insurance Tax Deductible

Is Health Insurance Tax Deductible?

For other individuals, health insurance premiums are normally deductible only to the extent their health insurance premiums combined with all other qualified medical and dental expenses exceed 7.5% of adjusted gross income.

You can generally deduct premiums you pay for yourself, your spouse, and/or your dependents.

This deduction is beneficial because it lowers your adjusted gross income (AGI). A lower AGI can help you avoid or reduce the impact of certain phase-out rules that can reduce or eliminate other tax breaks.

Self-Employed/Independent Contractors

As a self-employed individual, you may be able to deduct the premiums you pay for health, dental, and qualifying long-term care insurance coverage for yourself, your spouse, and your dependents.

This tax break is available to you whether you itemize your deductions or not. You can claim the deductions on Part II of Schedule A when you file your personal income tax return.

This deduction is beneficial because it lowers your adjusted gross income (AGI). A lower AGI can help you avoid or reduce the impact of certain phase-out rules that can reduce or eliminate other tax breaks.

Exception: You can only claim the health insurance premiums write-off for months during which neither you nor your spouse were eligible to join a qualified employer-sponsored group health plan.

Note: If you’re self-employed or an independent contractor, the deduction is not refundable. That means  the deduction cannot exceed the earned income you collect from your business.

Are Medical Expenses Tax Deductible?

Yes, qualified unreimbursed medical expenses are tax deductible for individuals––but only to the extent they exceed 7.5% of your adjusted gross income for the year.

For example, if your AGI is $50,000, you can deduct medical expenses that are more than $3,750.

Note that deducting unreimbursed medical expenses is different from deducting the cost of medical insurance premiums. While you can deduct premiums whether or not you itemize, you must itemize in order to deduct unreimbursed medical and dental expenses other than premiums.

However, if your medical expenses over and above 7.5% of your AGI, compared with all your other “below-the-line” potentially deductible expenses do not exceed your standard deduction, then you should not itemize and not try to claim these medical expenses as deductions, but instead take the standard deduction. 

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What Health Insurance Expenses Can I Deduct on My Taxes?

Medical expenses that are eligible for a deduction include:

  • Doctor’s visits and other medical services
  • Prescription drugs
  • Hospitalization and surgery
  • Medical equipment and supplies
  • Transportation to and from medical appointments
  • Long-term care expenses

Medical expenses that are generally not deductible include:

  • Cosmetic surgery
  • Dental care that is not medically necessary
  • Over-the-counter medications
  • Health club memberships

For a full discussion of what kinds of medical expenses are deductible, see IRS Publication 502.

Do Small Businesses Get a Tax Credit for Offering Health Insurance?

Yes.

Qualified small businesses may get a tax credit worth up to 50% of the cost of offering an ACA-qualified SHOP plan to employees.

To get the tax credit, your business must meet all of the following criteria:

  • You have fewer than 25 full-time employees or the equivalent
  • Your average employee salary is about $56,000 per year or less
  • You pay not less than 50% of your full-time employees’ premiums
  • You offer SHOP coverage to all of your full-time employees.

You do not have to extend benefits to employees’ dependents or to workers working fewer than 30 hours per week to qualify for the tax credit.

Note: The smaller your business, the bigger the potential tax credit. The biggest credits are offered to businesses with 10 employees or fewer who are paid an average of $27,000 or less.

Are Long Term Care Insurance Premiums Deductible?

You can also deduct certain qualified long-term care insurance premiums, as well. 

As of 2024, self-employed people and independent contractors may deduct 100% of  qualified long term care insurance premiums, up to these age-based annual caps:

  • Age 40 and below   $470
  • Age 41-50               $880
  • Age 51-60               $1760
  • Age 61-70               $4710
  • Age 71 and over      $5880

Are Health Sharing Plan Costs Tax Deductible?

No, health sharing costs are generally not tax deductible to individuals and families.

However, health sharing contributions typically save so much money each month compared to the unsubsidized cost of traditional ACA Marketplace-qualified health insurance policies that it often makes sense to join a health sharing plan – especially for those generally in good health with no serious pre-existing conditions.

Businesses that contribute to health sharing plans on employees’ behalf as an employee benefit can generally deduct these health sharing costs as an employee compensation expense.

Learn More: How Much Does Health Sharing Save Compared to Traditional Health Insurance?

Business Owners

If you’re a business owner-employee, this means you can potentially join your employee group arrangement with a health sharing plan and deduct the costs of your own membership along with those you pay for all your other employees as a compensation expense.

Note: The amount you pay for employees’ health share memberships must be counted as ordinary income. Unlike traditional group health insurance premiums, health share membership fees don’t qualify for tax free treatment as an employee benefit.

If you are not an owner-employee, then you would have to treat your own health sharing membership as an individual plan. You would not be eligible for a tax deduction then.

But again, it may still be worthwhile to elect to join a health sharing plan rather than a traditional health insurance plan, due to the substantial monthly savings, even without a tax deduction.

Tax Treatment  of Employer-Paid Health Benefits

To EmployerTo Employee
Qualified Group Health Insurance BenefitTax-deductible to employerTax-free to employee
Employer-Paid Health Sharing Membership Tax-deductible to employerTaxable to employee

Are Disability Insurance Premiums Tax Deductible?

That depends on your situation.

Generally, when you buy disability insurance on your own, for your own personal benefit, you can’t deduct premiums. But that means any disability benefits you receive under that policy will be tax free.

However, if you are a business owner, you can deduct the cost of disability insurance benefits you pay on your employees’ behalf as a compensation expense. If you’re the owner/employee of your own corporation, this means you can potentially deduct the costs of your own group disability insurance premiums together with those of your employees.

Note: If you deduct the cost of your company’s group disability insurance from your business taxes, any disability benefits paid to your employees will be taxable to your employee. And to you, if you’re a member of your own group plan.

This could mean the disability insurance benefits that you assumed would pay 65% of your pre-disability income could pay just 50% or even less, depending on your tax bracket, or those of your employees.

There are multiple ways to structure a group disability benefit. The method you choose may affect how benefits are taxed, and that can have a significant unintended effect on plan beneficiaries, just when they need the cash the most.

That’s why it’s a great idea to consult with an HSA for America Personal Benefits Manager before putting your group plan in place, or before purchasing your own individual disability insurance policy. 

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Questions?

HSA for America does not provide individualized tax advice. But we do connect individuals, families, and employers with the very best health plans available – whether they’re traditional health insurance solutions or affordable health sharing plans.

For a free personalized consultation and analysis, quotes, or for enrollment help, make an appointment today with one of our highly-trained Personal Benefits Managers.

For Further Reading: How Much Can An HSA Save in Taxes? | Is Health Sharing Tax Deductible? | Affordable Health Plans When You’re Self-Employed

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