There are tax benefits available to self-employed individuals who pay health insurance costs. Self-employed taxpayers can deduct 100% of their health insurance costs in computing their income taxes. Show Let’s review the tax rules on health insurance premiums. Health insurance premiums paid by non-self-employed taxpayers are deductible as itemized medical expense deductions, but only to the extent your total medical expenses exceed 7.5% of your adjusted gross income (AGI). For tax years ending after 2018, medical expenses will be subject to a 10%-of-AGI floor, instead of the 7.5%-of-AGI floor. Because of the “floor” that applies to the medical expense deduction, if total medical expenses don’t exceed 7.5% of AGI (or 10% after 2018), no itemized deduction is available. Also, with the increased standard deduction there will be fewer taxpayers that can itemize so it more advantageous to deduct these premiums through the business if possible. A self-employed taxpayer can deduct medical insurance premiums -as an “above the line” deduction, reducing taxable income for 100% of the health insurance costs for the taxpayer, spouse, and dependents. The health insurance deduction for self-employed taxpayers only applies for any calendar month in which you aren’t otherwise eligible to participate in any other subsidized health plan. Also, the deduction can’t exceed your earned income from the trade or business for which the health insurance plan was established. These rules also apply to sole proprietors, partners in partnerships and more-than-2% shareholders of S corporations where the company pays for health insurance coverage for its owners, partners or shareholders. The tax benefits of a self-employed individual’s health insurance costs can effectively reduce your cost of health insurance. You may wish to consider stepping up your coverage considering these savings. Contact us if you wish to discuss how these rules apply to your particular situation or if you have any questions. This is another Question ForMy Account. If you have a question or need personal income tax services in Clearwater, Largo, Dunedin, Oldsmar, Lutz or Land O’ Lakes, contact FMA, C.P.A. and let us show you the way! In this article:
With the average cost of a day in the hospital topping $2,600, having health insurance is essential to peace of mind. But coverage comes at a cost. Fortunately, health insurance premiums and other medical expenses may be tax-deductible, as long as they exceed a certain amount and you itemize your deductions. Can you deduct the cost of your health insurance—and does it make financial sense to do so? Here's what you need to know. Any health insurance premiums you pay out of pocket for policies covering medical care are tax-deductible. (Medical care policies cover treatment including hospitalization, surgery and X-rays; prescription drugs and insulin; dental care; lost or damaged contact lenses; and long-term care, with some limitations.) When preparing your taxes, you can deduct these expenses for yourself, your spouse and your dependents. Premiums for insurance purchased through COBRA are deductible, as are Medicare premiums for Part B and D. If you are not enrolled in Medicare under Social Security and are not a former government employee who paid Medicare tax, premiums paid for Medicare A are also tax-deductible. If you buy health insurance through the federal insurance marketplace or your state marketplace, any premiums you pay out of pocket are tax-deductible. If you are self-employed, you can deduct the amount you paid for health insurance and qualified long-term care insurance premiums directly from your income. This reduces your adjusted gross income (AGI), which lowers your tax bill. You may also be able to deduct medical and dental expenses as itemized deductions on Schedule A of IRS Form 1040. Whether
you're employed or self-employed, however, you can't deduct all of your medical expenses—only the amount exceeding 7.5% of your adjusted gross income. Health Insurance Premiums That Aren't Tax-DeductibleNot all health insurance premiums are tax-deductible. You can't deduct the portion of your premiums that your employer pays, for example, or any premiums that come out of your paycheck pretax. If you are enrolled in Medicare under Social Security, your Medicare A premiums are paid by Social Security and aren't tax-deductible. Does a tax subsidy cover part of your premiums for health insurance through a state or federal insurance marketplace? If so, you can't deduct that portion of your premiums—just the amount you pay out of pocket. What Medical Expenses Are Tax-Deductible?Health insurance premiums aren't the only medical costs that may be tax-deductible. If you itemize deductions, you can also deduct qualified medical expenses for yourself, your spouse and your dependents. Deductible medical expenses include payments for:
The total amount you deduct for medical expenses must be reduced by any reimbursement you receive, whether the reimbursement is paid to you or to the medical provider or facility. Should You Take the Standard Deduction or Itemized Deduction?There are two main questions to ask when deciding whether to itemize: Are your medical expenses greater than 7.5% of your AGI? You can only deduct the portion of your medical expenses that exceeds this amount. For example, if your AGI is $100,000 and your medical expenses were $10,000, you could only deduct $2,500 of that amount ($10,000 - $7,500). Do your itemized expenses exceed the standard deduction? The standard deduction is a set amount you can deduct from your taxable income to reduce your tax liability. For tax year 2021, the standard deductions are:
Additional deductions are allowed for blind people and those 65 or older. If someone else claims you as a dependent, your standard deduction may be lower. If your total deductions are higher than the standard deduction, it may make sense to itemize. Medical expense deductions aren't the only factor to consider. You may also want to itemize deductions if you:
Some people don't qualify for the standard deduction. How deductions affect your state tax bill may also factor into your decision. For
more information, visit the IRS website, which has a tool you can use to see if you can deduct medical expenses, use tax preparation software or talk to your tax preparer. Lower Your Health Care CostsItemizing medical expenses is just one way to lower your health care costs. Your employer may offer a Flexible Spending Account (FSA), or you may be able to set up a Health Savings Account (HSA); both provide tax advantages to reduce the cost of health care. If you pay any health insurance premiums out of pocket, know
that a late or missed payment can negatively affect your credit score. Consider setting up automatic payments to ensure that both you and your credit stay in good health. |