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IS HEALTH INSURANCE TAX DEDUCTIBLE?
Wondering if health insurance is tax-deductible? A number of tax breaks will help you cover your premiums for health insurance. However, to make the most of these incentives, you need to know the rules and some key strategies.
Health Insurance is costly, particularly if you lose your job or don’t have coverage from your employer.
You typically have to pay annual premiums for your coverage. Whether you have health insurance through your employer or on your own or even if you’re covered by Medicare.
Yet you may be tax-deductible on your insurance, or you may be eligible to take some tax breaks that will help lower your expenses and extend your health care dollars. Here’s how to decide whether you are eligible for these tax benefits.
Self-Employed Health Insurance Tax-Deductible Premiums
If you have income from self-employment and are not required to enroll in a health plan provided by an employer (or your spouse’s employer), your health insurance premiums will be tax-deductible. To be eligible, you do not have to itemize-you take the deduction on Schedule 1 of Form 1040. The deduction is limited to the net benefit you registered on Schedule C from self-employment profits.
Health Insurance Tax Deductible Itemized Medical Cost Deductions
If you itemize your deductions, health insurance premiums will qualify as a tax-deductible medical cost (along with other medical out-of-pocket expenses). After they surpass 7.5 percent of your total gross income, you can only subtract medical expenses. See IRS Publication 502 on Medical and Dental Expenses for more information on tax-deductible medical expenses.
However, you can’t double-dip and report those premiums as a tax-deductible medical cost if you have health insurance via your employer and pay your premiums with pretax money, says Morris Armstrong, a registered agent and registered investment advisor in Cheshire, Connecticut. But there are several occasions where persons on an after-tax basis pay premiums for employer-based coverage and do not know that they may be deductible.
If you lose your job, HSA Withdrawals can be tax-free
In general, you should not withdraw tax-free money from an HSA to pay premiums for health insurance, but there are a few primary exceptions that can benefit a lot of people right now. You will pay COBRA health insurance premiums with tax-free HSA withdrawals (COBRA is a federal provision that allows you to retain the coverage of your employer for up to 18 months after you lose your job). If you are earning unemployment payments, you can still withdraw tax-free cash from an HSA to pay health insurance premiums, even if you prefer to get your own coverage rather than sign up for COBRA.
“There is nothing special people need to do except keep good records,” says Roy Ramthun, president of HSA Consulting Services. If they obtain unemployment, they will like to retain copies of statements and payments reported when they started and stopped collecting unemployment compensation. This will decide the time over which the HSA would be entitled to tax-free reimbursement of their health insurance premiums. If you pay COBRA premiums, you can withdraw HSA tax-free even though you are not.
Biggest tax benefit
If you can keep the money growing in the HSA tax-free for the long term, you will get the biggest tax benefit, but it can still be worthwhile to contribute to an HSA even if you need to use the money immediately to pay for eligible health insurance premiums. When you file your revenue tax return, you will still be able to deduct your contribution, even if the money does not have time to grow in the account.
At any time, including years in the future, you can withdraw money from an HSA for qualified expenses, but the expenses must have been incurred after the date your HSA account was created.
You can contribute up to $3,550 for individual coverage in 2020 or $7,100 for family coverage (plus $1,000 if you’re 55 or older) if you have an HSA-eligible health insurance policy with a deductible of at least $1,400 for individual coverage or $2,800 for family coverage in 2020. Also, if you have an HSA-eligible health insurance policy in 2019, you still have until July 15, 2020 to make tax-deductible contributions to an HSA. Keep in mind that if you only have an HSA eligible policy for part of the year, you may need to prorate your contribution amount. For more information, read IRS Publication 969, Health Savings Accounts.
HSA Withdrawals for Medicare Premiums Tax-Free
To pay the premiums for yourself as well as for your spouse, you can tap the account tax-free. You can withdraw the money tax-free from the account to reimburse yourself for the premiums if you have your Medicare premiums paid automatically from your social security benefits.
After you enroll in Medicare, you can’t make new HSA contributions, but you can use money that has already grown in the account to pay for Medicare premiums.
Government subsidies for coverage in the marketplace
You could qualify for a government subsidy to help pay the premiums if you buy health insurance through your state insurance marketplace or HealthCare.gov. Your adjusted gross income must be between 100% and 400% of the federal poverty level to qualify, which is up to $49,960 if you’re single, $67,640 for a couple, or $103,000 for a family of four. Technically, this subsidy is an advance premium tax credit you can either have it applied immediately to reduce your premiums, or when you file your income tax return, you can receive it as a refund.
When you buy coverage on the market, you need to estimate your annual income, but then the actual amount of the subsidy is based on your adjusted income for the year. If your income ends up being higher than you expected when you purchased the coverage, when you file your income tax return next spring, you may have to pay back some of the money.
Health Insurance Tax Deductible for Premiums for long-term care insurance
You may be able to get a tax deduction or to pay premiums for long-term care insurance using tax-free money.
If you itemize the long-term care insurance premiums, the medical expense deduction can also be counted towards (also subject to the 7.5 percent adjusted gross income threshold for medical expenses). Or for long-term care premiums, you can withdraw money tax-free from a health savings account. Depending on your age, the larger you are, the bigger the break, the number of long-term care premiums that count for the break.
If you are 40 years or younger, $810 if you are 41 to 50, $1,630 if you are 51 to 60, $4,350 if you are 61 to 70, or $5,430 if you are older than 70, you will withdraw or subtract up to $430 tax-free to pay long-term care premiums in 2020. You may also withdraw up to the amount depending on his or her age for premiums if your partner is also paying long-term care insurance premiums.
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