If you are doing your taxes right now, you might be wondering is the cost of health insurance tax deductible?
What about the other out of pocket expenses you pay for medical care like your deductibles, copayments and coinsurance?
Taxes are a pretty complicated issue but I’m going to do the best I can to walk you through what medical expenses are tax deductible and which ones are not.
I’m also give you some tips you might not have thought of that can make it a lot easier to avoid taxes on some of these medical costs than waiting until tax time.
As always, use my information as a guide but rely on your tax advisor too.
Now, let’s dig in.
Health insurance premiums and taxes
Let’s start with the first part of your medical cost and that’s your premium. Here are several examples and whether or not you can deduct the insurance premium.
- Health insurance paid for the government Any health insurance premiums paid for by the government through programs like Medicaid are not tax deductible.
- Subsidies provided through the exchange Subsidies provided through federal or state exchange that reduce the cost of your premiums are not tax deductible.
- Employers contribution to your premium The amount of money that your employer pays towards the cost of your health insurance can’t be deducted by you but it can be by your employer. I should note here that special rules apply to S-Corporation owners when it comes to health insurance premiums for owners. If you are an S-Corporation owner, you’ll want to check with your tax advisor.
- Employees contribution to their own premium at work If you are an employee, you usually can’t deduct the cost of your own health insurance premiums. That’s because these premiums are already taken out on a pre-tax basis every time they are deducted out of your paycheck. This means you already got your deduction for those premiums and so you can’t take it twice. If for some reason they are not deducted on a pre-tax basis at work, then you could deduct them. But that would be pretty unusual if that were the case.
- Premiums used to purchase private health insurance either on the exchange or directly from the insurance company After tax dollars that are used to pay health insurance premiums for a plan you purchase are tax deductible.
OK. So those are some examples of when you can and cannot deduct your health insurance premiums on your taxes.
Let’s move on to the other out of pocket medical expenses that you might have and see if you can deduct those.
Can you deduct out of pocket expenses like deductibles, copayments, or coinsurance on your taxes?
The next set of medical expenses that you may or may not be able to deduct on your tax return are your out of pocket medical expenses.
In order for you to deduct these expenses on your tax return, you’ll need to meet a few requirements.
- Must be in that taxable year You can only deduct expenses that you paid during that tax year.
- Must be an eligible medical expense If the IRS doesn’t consider it an eligible medical expense then you can’t deduct it. An example of this would be nonprescription medicines or cosmetic surgery. Here’s a list of what the IRS considers an eligible medical expense.
- Can’t deduct what the health insurance company pays If the health insurance company pays the medical bill and you don’t then you can’t deduct it.
- Can’t deduct amounts you were reimbursed for Similar to the health insurance company paying your bill, if you get reimbursed by through your flexible spending account or health savings account, you can’t deduct those expenses. That’s because those amounts were already deducted on a pre-tax basis from your paycheck and you already avoided tax on that money.
- Actually pay the medical expenses If you receive a medical bill but do not pay it, you cannot deduct it. You can only potentially deduct what you actually pay.
- Itemize deductions on your tax return The next requirement is that you must itemize your deductions on Schedule A of your tax return. If you don’t itemize your deductions but instead take the standard deduction, you won’t be able to deduct these other out of pocket expenses. Each year, you should always check to see if your itemized deductions exceed the standard deduction. If they do, then you have met the first requirement. Programs like TurboTax or your tax advisor can help you determine which is higher. In most cases, most people don’t itemize their deductions. If that’s the case, you won’t be able to deduct those expenses.
- Meet the threshold percentage of adjusted gross income Currently, if your out of pocket medical expenses exceed 7.5% of your adjusted gross income, you can deduct the amount above 7.5%. For example, if your adjusted gross income is $100,000 and you had $10,000 in out of pocket medical expenses then here’s how to calculate the deduction. You take $100,000 times 7.5% which equals $7,500. Then take your actual medical expenses, in this case $10,000 dollars and subtract the $7,500. Here that would be $10,000 minus $7,500 or $2,500. That means you could deduct $2,500 from your taxes. The 7.5% threshold increases to 10% in 2019.
The main drawback that people have in deducting these expenses is exceeding the threshold of eligible medical expenses if they do itemize.
I’d guess most people don’t itemize and just take the standard deduction which means a lot of people use after tax dollars to pay for all of those out of pocket medical expenses since they aren’t in a position to deduct them on their taxes.
But there is a way to pay for your medical expenses with pre-tax dollars out of your paycheck and avoid having to meet that threshold.
This is essentially the same as deducting them on your tax return but instead of waiting until tax time, you get the tax benefit each time you get paid.
Let’s review how to do that.
Using flexible spending accounts and health savings accounts to pay for eligible medical expenses instead of deducting them at tax time.
There are two tools you can use to pay for medical expense using pre-tax dollars. The first tool is a flexible spending account and the second one is a health savings account.
Let’s talk about each of these.
- Flexible spending accounts (FSA) If you are employed and your employer offers a flexible spending account, you can set aside a portion of your pay each paycheck that is deducted on a pretax basis. You can then use this money to pay for expenses. For this year, the amount you can set aside in 2019 is up to $2,700. Due to the nature of the use it or lose it nature of flexible spending accounts, a lot of employees are afraid to use flexible spending accounts. But if you know that you’ll have that much in expenses, you’d be crazy not to do it.
- Health savings accounts (HSA) If you are afraid of the use it or lose it provision of the FSA, the option of a health care savings account might appeal to you. That’s because you don’t lose the funds if you don’t use them in the current year they carry over. HSA’s also carry a higher amount you can contribute. The limits are $3500 for individuals and $7000 for families which means you can deduct more on a pretax basis. An employer may also be contribute to your HSA. If the do, that will reduce the amount you can contribute. Keep in mind that not everyone is eligible for an HSA however, so you’ll want to review your eligibility to see if that will work for you. Here’s a link to the eligibility guideline for HSA’s.
As you can see in both of these options, you can take advantage of the pre-tax nature of both to potentially avoid the need to try and deduct them on your tax returns. However, you do need to do a little bit of preplanning to figure out how much to set aside in these accounts.
However, you can’t do both an HSA and an FSA at the same time with the exception of a limited purpose FSA.
In my opinion, the HSA and eligibility and contribution rules can be way more complicated than they should be.
Hopefully this article helps you get a clearer picture of whether or not you can deduct health insurance premiums and the other out of pocket expenses you might have during the year.
Let me know in the comments if you use your HSA’s or FSA’s to help reduce your taxes on medical expenses or if you have ever itemized expenses instead.
Also, let me know if you have any questions as well.