If you are self-employed, the answer often is yes—the premiums you pay to cover yourself and your dependents are probably tax-deductible, as long as you’re obtaining your own health insurance and aren’t eligible to participate in a health plan that’s subsidized by your spouse’s employer (or your own employer, if you have a job in addition to your self-employment).
This is true regardless of whether you get your insurance through the exchange, or in the individual market outside the exchange. Premium subsidies (premium tax credits) are available in the exchange, but not outside the exchange. Either way, self-employed individuals can only deduct the amount they actually pay in premiums. There’s no “double-dipping” allowed, so if you receive a premium subsidy (ie, a premium tax credit) in the exchange to cover a portion of your premium, you can only deduct your after-subsidy premium on your tax return.
It’s important to understand that the amount of premium subsidy you receive is related to your modified adjusted gross income (an ACA-specific calculation, which differs from normal modified adjusted gross income), but the premiums you pay for health insurance as a self-employed person are a factor in determining your modified adjusted gross income. This ends up being a circular problem: Your premium subsidy depends on your adjusted income, but your adjusted income depends on your premium subsidy. But the IRS has addressed this issue, and your tax adviser or tax software can help you sort it out.
But even if you’re self-employed, if you, your spouse, or your dependents are covered by an employer’s group health insurance plan (either your own, from a separate job, or your spouse’s or parent’s plan), the premiums you pay for that coverage are probably not something you can deduct on your tax return. That’s because they’re most likely already being paid with pre-tax dollars since employer-sponsored health insurance is tax-deductible for both employers and employees. And the IRS clarifies in Publication 535that even if you buy your own health insurance and are self-employed, you can’t deduct the premiums if you’re eligible to have coverage that’s subsidized by an employer, including your own or your spouse’s.
Health Savings Accounts
If you have an HSA-qualified high deductible health plan (HDHP), you may have a health savings account (HSA). Your HSA may be established through your employer, or it may be something that you set up on your own, as you can have an HDHP offered by an employer or purchased in the individual market.
The contribution you make to your HSA is 100 percent tax deductible up to a limit of $3,500 if your HDHP covers just yourself, or $7,000 if it also covers at least one other family member (these limits are for 2019; they change each year, and will be slightly higher—$3,550 and $7,100—in 2020). Contributions to your HSA can be made by you or by your employer, but only the portion you contribute yourself is tax deductible. If you fund your HSA through payroll deduction, the contributions will be made on a pre-tax basis, and that will be reflected in the W-2 you receive (ie, you won’t have to deduct them on your tax return, as they will have already been deducted from your taxable income). But if you fund your own HSA, you’ll keep track of the contributions you make during the year and deduct the total on your tax return (your HSA administrator will also keep track of the amount and will report it to you and the IRS using Form 5498-SA).
The premiums that you pay for your HDHP can also be deducted, just like any other health insurance premium, if you’re self-employed. Or, as described in the next section, as part of your overall medical expenses if you itemize your deductions and your medical expenses are high enough to qualify for the deduction. And if you obtain your HDHP via your employer, the premiums are most likely already being paid on a pre-tax basis.
Premiums as part of overall medical expenses
Even if you are not self-employed, the Internal Revenue Service (IRS) allows you to count medical and dental insurance premiums (and with some limitations, long-term care insurance premiums) as part of the 10 percent of your adjusted gross income (AGI) that has to be spent on health care before any out-of-pocket medical expenses can be deducted (the deductibility threshold for medical expenses was 7.5 percent of income prior to 2013, and again in 2017 and 2018).
A long list of health-related expenses can be included in your total medical expenses, including prescription medications and optional surgical procedures, like laser eye surgery to correct vision. The IRS has a list on its website. Keep track of the out-of-pocket expenses you incur during the year—including health insurance premiums if you’re buying your own plan but are not self-employed. If your total costs exceed 10 percent of your AGI, you’ll be able to deduct the costs above that threshold, assuming you opt to itemize your deductions—more on that in a moment.
So for example, if your AGI is $50,000 and you spend $8,000 on medical costs, including health insurance premiums that you pay yourself and aren’t otherwise eligible to deduct, you’d be able to deduct $3,000 worth of medical expenses on your tax return (10 percent of $50,000 is $5,000, so you’d be able to deduct the amount in excess of $5,000 in this scenario).
Note that prior to 2013, medical expenses were deductible if they were in excess of 7.5 percent of AGI. But the ACA increased it to 10 percent starting in 2013, although it remained at 7.5 percent for people age 65 and older, through the end of 2016. However, the GOP tax bill (the Tax Cuts and Jobs Act) that was enacted in December 2017 reset the threshold to 7.5 percent for all tax filers, for 2017 and 2018. So instead of having to spend more than 10 percent of your income on medical costs (including premiums) in order to qualify for a deduction in 2017 and 2018, you only had to spend more than 7.5 percent. This expired at the end of 2018, however, and reverted to 10 percent for all tax filers. So as of 2019, only medical expenses that exceed 10 percent of income are eligible for the deduction.
And in order to deduct medical expenses, you have to itemize your deductions. This is in contrast to the two scenarios described above—the self-employed health insurance premium deduction and the Health Savings Account deduction—both of which can be utilized regardless of whether you itemize deductions. The Tax Cuts and Jobs Act substantially increased the standard deduction, making the standard deduction the better choice for most tax filers. In order to benefit from itemizing your deductions, you’ll need a lot of expenses that can be itemized. Depending on your medical costs and other itemizable expenses, you may come out ahead this way. And you should certainly keep track of your medical expenses throughout the year so that you’ll be able to sort it all out at tax time. But keep in mind that with the new standard deduction amounts, it’s much less likely now that you’ll end up itemizing your deductions, including medical expenses.
This is just an overview of how the IRS treats health insurance premiums. If you have questions about your specific situation, but sure to speak with a tax advisor.
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