Is health insurance taxable income?
With all the changes in tax law over the years and the Affordable Care Act only a few years old, people are still wondering whether their health insurance premiums are tax deductible.
The answer is maybe.
Currently, you can only claim health insurance premiums as a tax deduction if you pay for it. If someone else, such as an employer or the government, pays your health insurance premiums you can’t claim it as a tax deduction.
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Is Marketplace health insurance tax deductible?
Now it’s time to talk about health insurance purchased through a Health Insurance Exchange created by the Affordable Care Act. These insurance programs are state-based of federally facilitated.
When you buy health insurance through this method, you received an advanced tax credit. The credit is how your health insurance premiums were offered at a reduced rate. The subsidy you received through the Affordable Care Act cannot be claimed as a tax deduction.
Health Insurance Premiums Paid with Pre-Tax Income Isn’t Deductible
You also can’t use the premiums you paid with pre-tax monies as a tax deduction. What this means is if your health insurance premiums are taken out of paycheck from your employer before taxes are calculated, you can’t claim the premium amounts as tax deductible.
The reason you can’t receive a tax deduction for premiums that were paid with pre-tax money is that you already received a benefit from the same money.
Health Insurance Paid Premiums Calculations
Do you know whether your health insurance premiums are taken out of your check before or after taxes are calculated? It’s easy to find out by talking to your company’s payroll department? You can also find this information on your W-2.
What you are looking for is whether the premiums that were deducted from your income were considered income or not. To find this, look at Box 1 (wages) on your W-2.
If your premiums are paid with pre-tax money, it is not considered income, which will be obvious on the W-2.
If your premiums were paid with after-tax money, it is considered income and shows that in your W-2.
If your premiums are not reported as part of your income on your W-2, you cannot claim it as a tax deduction because it is already tax-free.
Are Self-Employed Tax Premiums a Deduction Expense?
If you are self-employed and purchase your health insurance, your insurance premiums may be tax deductible if you meet several guidelines. To be eligible to claim your health insurance premiums as a tax deduction, you must not qualify for an employer-sponsored health program through your spouse or partner.
If a self-employed individual is eligible to write-off their health insurance premiums as a tax deduction, the deduction cannot be more than the person earned in a year.
Self-employed individuals’ health insurance premiums are reported as an adjustment to income. The total is listed on the first page of Form 1040 and not listed with tax deductions. What this means is that it appears to decrease your overall income.
What are the limitations on health insurance premiums paid with after-tax money?
If you purchased health insurance and paid the premiums with your after-tax money, you may be able to claim your out of pocket cost as a deduction when filing taxes, but limitations exist.
For example, if you bought individual or family health insurance under an Affordable Care Act exchange, the amount you paid out of pocket may be listed as a tax deduction. To get this deduction, list it as a medical expense on Schedule A of Form 1040. It’s important to remember the deduction may be limited.
Are Medicare premiums tax deductible?
If you pay Medicare premiums for Part B, Part C, or Part D Medicare, the amount you paid during a calendar year may be tax deductible. Premiums paid for Medigap supplemental premiums are also deductible. However, any allowable amount can’t be more than 7.5 percent of a person’s income.
Medicare Part A premiums are not always tax deductible. Medicare Part A is automatic. A person receives these benefits because they or their spouse paid payroll taxes. As a result, there is nothing to deduct in regards to taxes. But, there are exceptions to the rule. Medicare Part A premiums may be deductible if:
- No Medicare taxes were paid while working
- Person receives Medicare Part A without collecting social security
- Voluntarily enrolled in Medicare A
- Pay Medicare Part A premiums
Limitations on Premium-Related Tax Deductions
If you qualify for tax deductions based on health insurance, it’s important to know there are limitations with this type of write-off. For instance, there are limits on how much of your premium can be written off.
If you’re filing taxes using Schedule A, you can only write off your health insurance as a medical expense if the total exceeds 10 percent of an adjusted gross income. The percentage is slightly lower for seniors over 65 years old.
Premiums aren’t the only medical expenses that count in this category. Instead, you add up your health insurance premiums and all unreimbursed medical expenses. Examples of unreimbursed medical expenses include:
Once you’ve added all medical expenses together, if your total is greater than 10 percent of your adjusted gross income, you can deduct it as an expense on your taxes
Limitations on Tax Deductions for Self-Employed Tax Payers
The only exception to the 10 percent rule is for self-employed individuals. Self-employed taxpayers don’t have to reach the 10 percent threshold to write their health care premiums off as a tax deduction. The reason it is different in independent situations is that the premiums are written off as an adjustment to income and not an actual deduction. However, there are profitability limits, which mean you cannot claim a health insurance premium adjustment that is greater than the amount you claimed as income.
For questions about your unique situation, consult a tax professional. They help make filing faster, simpler, and can save you thousands.
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