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HEALTH Insurance
HEALTH INSURANCE INSIGHTS

You may be able to deduct medical and health insurance costs on your federal income taxes. Here's a look at who qualifies for the tax deduction and how to calculate qualified medical expenses. 

Health insurance can be tax deductible, but it depends on the health care services, how much you spent and your adjusted gross income. 

Few taxpayers qualify for the deduction. George Birrell, certified public accountant and founder of Taxhub, said the limits and how to apply for them can be confusing. One of the biggest points of confusion is what qualifies as a medical expense and whether your plan's health insurance premiums are tax deductible.

For example, tuition for children who require special needs is considered a medical expenditure, but most consumers do not realize this and often miss this deduction,” Birrell said.

KEY TAKEAWAYS
  • Health insurance premiums are tax-deductible, but it also depends on the health care services and the amount you pay.
  • You can deduct common items such as medical appointments, surgeries, tests, prescription drugs and durable items like wheelchairs and home care etc., from taxes.
  • Over the counter drugs, medical marijuana, cosmetic surgery and health care covered by health savings aren't tax deductibles.
  • You never know when you might need health care. If you plan, you can make the most of your deductions by bundling up procedures.

Can you deduct all health insurance costs?

No, you can only deduct eligible medical expenses and health insurance costs that exceed a certain level of your adjusted gross income (AGI).

People think they’re able to deduct all health insurance coverage, but that’s not the case. For instance, you can’t deduct what your employer pays for your coverage. Another example is when your health plan covers a percentage of your health care services. You can only use what you paid for health care as deductions. 

Let’s say you go to the doctor and receive $100 worth of health care services. If your health insurance plan covers 75% of that $100, you can’t put in all $100 for a deduction. 

This means that you can only write off $25 as part of your costs because your insurance company is covering the rest,” said Jack Choros, content manager at Iron Monk Solutions.

Now, let’s take a look at how to deduct medical expenses and health insurance from your federal income taxes.

Who qualifies for medical expense tax deductions?

The Internal Revenue has two critical eligibility rules for people who don’t own a business:

  • A standard deduction is $12,400 for singles, $18,650 for heads of household and $24,800 for married joint filers for the 2020 tax return. If your tax deductible health insurance costs don’t exceed those limits, it’s best to go with a standard deduction rather than itemize your health care deductions. 
  • Your health care costs must exceed 7.5% of your adjusted gross income for 2020 tax filings. The AGI is what you earn in wages, investments and other sources minus things like alimony and student loan interest. You can find your adjusted gross income on line 37 of Form 1040. Note: starting with 2021 taxes, medical costs will have to exceed 10% of your AGI. 

So, the first question to answer is: How many eligible health care costs do you have? If your health care costs are less than the standard deduction amount, you should take the standard deduction instead. 

Chris Peterson, tax manager at CB Smith & Associates, said most people take the standard deduction rather than itemize health care deductions because they don’t exceed the standard deduction level.

Is health insurance tax deductible for 2020 and 2021 tax year?

Yes, if you reach the two above requirements, you could include out-of-pocket medical expenses that involved a doctor or health care professional.

Common items you can deduct from taxes include:

  • Medical appointments
  • Surgeries
  • Tests
  • Prescription drugs
  • Durable items like wheelchairs
  • Prescription glasses
  • Home care
  • Guide dog or service animal
  • Wigs for patients who lost their hair due to illness

You can also deduct transportation expenses for going to the doctor -- parking, tolls, mileage, cab or bus fares -- and even airfare and certain lodging costs for out-of-town treatments. (See IRS Publication 502 for a list.)

But remember, you can only write off out-of-pocket expenses -- copays, deductibles, etc. You can’t write off the portion of the bills that your health plan or employer paid if you have an employer-sponsored plan.

Alan Steeples, certified public accountant and tax services manager at InConcert Financial Group, said the key to whether something is eligible for tax deduction is if a medical professional prescribed or recommended it. That can even include whirlpools for severe arthritis and air purification systems for patients with asthma. On the flip side, over-the-counter medication and vitamins aren't usually eligible for deductions. 

“Rule of thumb: If it’s not prescribed or recommended by a physician, you can’t write it off,” Steeples said.

How to calculate your health care deductions

Most people don’t accrue enough medical expenses to make health care deductions worth it. 

Remember that a standard deduction is more than $12,000 for individuals and nearly $25,000 for joint filers. Plus, your eligible health care costs must exceed 7.5% of your AGI in 2020 and 10% in 2021.

However, if you do have enough medical expenses, here’s how calculating health care deductions work. 

Let’s say you have an AGI of $100,000. So, 7.5% percent of the AGI is $7,500. Any qualifying medical and health care costs beyond that amount are tax deductible. 

If you have $15,000 in qualified expenses, you can deduct $7,500 from your taxable income when you file your taxes if you don’t take the standard deduction. 

If you have a health plan from the health insurance marketplace, sometimes known as Obamacare, you shouldn’t deduct money for premium tax credits. Those plans often have subsidies like tax credits that reduce the cost of Affordable Care Act plans. You shouldn’t include those subsidies in your deductions. 

Self-employed health insurance deduction

Peterson said self-employed people who aren’t considered an S Corporation can deduct health insurance premiums as an adjustment to their gross income.

“S-corp shareholders have to put their premiums on their W-2 Forms. This is where the corporation deducts the premiums, essentially, as additional salaries and wages paid,” Peterson said.

Serrano said self-employed people with a net profit for the year can deduct medical and health expenses without itemizing expenses. He added that there's no need to itemize your deductions because it’s an adjustment to your income.

Steeples said that most self-employed business owners can write off health insurance premiums as an above-the-line deduction.

“These deductions reduce the business owner’s AGI dollar for dollar and can be significantly more advantageous than including their premiums in their itemized deductions,” Steeples said.

Choros also said self-employed people are likely charging clients sales tax. “This means you can write off the sales tax when you’re paying for medication or health care. If you were employed by the company as an employee, you would not be able to do this,” Choros said.

Self-employed people can deduct health insurance premiums directly on Form 1040 (Line 29 on returns). You deduct all other qualified medical expenses on Schedule A, Line 1.

How to maximize your health care deductions

You can’t control when you need health care. However, you can bunch up procedures to maximize deductions.

Say you have a handful of nagging health issues. They’re not life-threatening, but they’re affecting your quality of life. You could decide one year to get all of those pesky problems fixed, reach the tax deductible threshold and apply for a deduction at tax time.

One last piece of advice -- you don't need to attach receipts to your 1040, but it's a good idea to keep them for three years after filing your return just in case the IRS audits you.

Frequently asked questions about health insurance deductions

What is a qualified medical expense?

The IRS considers medical expenses the “costs of diagnosis, cure, mitigation, treatment or prevention of disease and for the purpose of affecting any part or function of the body.”

Expenses include payments for legal medical services by:

  • Physicians
  • Surgeons
  • Dentists
  • Other medical practitioners

Medical expenses that can be eligible include costs for:

  • Equipment
  • Supplies
  • Diagnostic devices

Medical care expenses must be primarily to alleviate or prevent a physical or mental disability or illness. They don't include expenses that are merely beneficial to general health, such as vitamins or a vacation,” according to the IRS.

Medical expenses can also include:

  • Health insurance costs
  • Pay for transportation to get medical care
  • Long-term care costs

Is it worth claiming medical expenses on taxes?

It depends on how much you’ve spent on health care for the year. 

The medical expenses need to exceed the standard deduction. For tax year 2020, that’s $12,400 for individual filings and $24,800 for joint filings and comprise more than 7.5% of your AGI.

So, to file medical expenses, they would have to reach those levels to benefit from claiming medical expenses on your income tax.

Can you deduct health insurance premiums?

Whether you can deduct health insurance premiums depends on the plan. You can’t deduct health insurance premiums if your employer or the government pays all of your premiums.

Employer-sponsored health insurance premiums are pre-tax dollars, so you can't deduct those from your taxes.

However, Affordable Care Act, COBRA and Medicare plan premiums are eligible for tax deductions if health insurance premiums aren't paid with pre-tax money.

Are Health Savings Account contributions tax deductible?

Similar to health insurance premiums, contributions to Health Savings Accounts aren't tax deductible if the money was pre-tax. If the money wasn't taxed, it's not eligible for a tax deduction because at that point you would benefit from not paying taxes twice.

Getting tax deductions for your health insurance isn’t usually possible. However, if you’ve had a year filled with doctor visits, medications and procedures, you should check to see whether you’re eligible for a tax deduction.