Is health insurance tax deductible?

Your health insurance is tax-deductible, based on your gross-adjusted income, the annual payments you make on your health insurance policy, and who makes those direct payments. Based on current federal tax law, you can deduct your yearly health insurance rates from your taxes if the amount exceeds 7.5% of your adjusted gross income. However, there are some situations where your health insurance is not tax-deductible.

Free Insurance Quote Comparison

 Secured with SHA-256 Encryption

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Full Bio →

Written by

UPDATED: Nov 18, 2021

Advertiser Disclosure

It’s all about you. We want to help you make the right legal decisions.

We strive to help you make confident insurance and legal decisions. Finding trusted and reliable insurance quotes and legal advice should be easy. This doesn’t influence our content. Our opinions are our own.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about legal topics and insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.

Overview

  • Your health insurance is tax-deductible based on the type of insurance you have
  • Other medical expenses may also be tax-deductible if they exceed a certain amount
  • Employer-sponsored health insurance is tax-free at the state level

Is health insurance tax deductible? Specifically, what insurance is tax-deductible, and are insurance premiums tax-deductible?

The list of health care expenses that you can itemize and deduct from your federal income taxes is extensive. It includes your annual health insurance payments. However, there are some exceptions.

Read on to know if you can buy health insurance that is tax-deductible at the state and federal levels. And if you want to look at rates from top health insurance companies in your area, enter your ZIP code into our free quote tool above.

When is private health insurance tax deductible?

Current tax law allows you to deduct health care expenses that exceed 7.5% of your adjusted gross income.

That means if you make $64,000 a year, for example, you can subtract any medical expenses that surpass $4,800 for the year. If you have $10,000 in medical expenses for the year, that is a $5,200 deduction.

Your medical expenses include things like out-of-pocket medical and dental costs. Also, if you need to travel to a health conference that is pertinent to a chronic illness that you or a family member has, you can deduct some of those expenses.

According to the Internal Revenue Service, you can deduct the amount of money you pay for health care policies that cover medical care for you and your family and “qualified” long-term care insurance.

An exception to this rule regarding policy payments is when you have employer-sponsored health insurance. Also, you may not deduct any other medical expenses for which your employer is responsible.

Even though you may see payments on your health care policy reflected on your paycheck, your employer makes the direct payments on the policy.

However, you may get a deduction if your employer does tax withholding and includes your portion of the policy payments in box 1 of your W-2 form.

Free Insurance Quote Comparison

Enter your ZIP code below to compare cheap insurance rates.

 Secured with SHA-256 Encryption

Is health insurance tax deductible for the self-employed?

Yes, if you are self-employed, you can deduct the payments you have made on health insurance policies for yourself, your spouse, and any dependents.

These also include payments you made on a policy for any of your children. It applies to biological child, stepchild, adopted child, foster child under 27 years old. They do not have to be a dependent.

The IRS sees your medical expenses as an adjustment to your income rather than something you need to itemize.

You are eligible for a self-employed deduction if you:

  • Make a profit during the year and report your earnings on Form 1040 (Schedule C or F).
  • Are a partner in a business. However, you must report your net earnings from self-employment on Form 1065 (Schedule K-1, box 14, code A).
  • Receive wages from an S-corporation, and you own more than 2% of its shares. You must report payments on your insurance policy on Form W-2.

You can even be eligible for this deduction by using various methods to calculate your net earnings during the year and report them on Schedule SE. It does not matter whether your total medical expenses total 7.5% of your yearly income or less.

Is health insurance tax deductible for small businesses?

Yes, small businesses, like larger businesses, may deduct many medical expenses they pay for their employees. The following are qualified expenses:

  • Payments small businesses make on their employees’ health insurance policies
  • Annual contributions to a Health Savings Account with a group health insurance plan
  • Tax-advantaged dollars

Regarding tax-advantaged dollars: Some small businesses may only afford to reimburse their employees for medical expenses up to a certain point. So, instead of a group health insurance plan, a small business owner can set up a health reimbursement account.

Do you own a small business that has less than 50 employees? If this is the case, and you cannot afford to invest in a group health plan, you can offer a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA).

A QSEHRA gives your employees a monthly allowance to help them purchase their health insurance policies and make payments. The money that your employees receive through an HRA is tax-free. You can even receive a tax break for the expense.

In which states is health insurance tax deductible?

Is affordable health insurance tax-deductible in states? Specifically, are health insurance payments tax-deductible in states like California? In a manner of speaking, yes.

For instance, you may only receive tax breaks for your payments on your health insurance based on your employment situation and overall income. However, if you are self-employed, the expenditures you make on your health insurance policy are taxable.

Free Insurance Quote Comparison

Enter your ZIP code below to compare cheap insurance rates.

 Secured with SHA-256 Encryption

What if you’re using employer-sponsored health insurance?

If you are using your employer-sponsored insurance, that is not considered taxable income at the state or federal level.

Additionally, if your employer reimburses you for your payments on your health insurance, that is not taxable income, either. Your employer can do this in one of three ways under Section 125 of the federal tax code:

  • Your employer can help lower your income tax payments by using your pre-tax dollars to pay on your health insurance.
  • You can use a flexible spending account plan to pay for eligible out-of-pocket expenses (up to $2,500).
  • You can enroll in a cafeteria or flexible benefits plan. With this arrangement, you can choose between taxable pay and nontaxable benefits.

However, your employer must specify that the extra money they gave you was a health insurance reimbursement.

On the flip side, any payments for the coverage your dependents and opposite-sex spouse enjoy may be taxable, even if they are on your employer-sponsored health insurance. California expands this to same-sex spouses and domestic partners.

How to get healthcare from a marketplace?

You may use the premium tax credit to buy health insurance from a Marketplace depending on your total yearly income and your state.

The premium tax credit will help lower your monthly insurance rates when you purchase a bronze, silver, gold, or platinum plan from a health insurance Marketplace. (The bronze plans tend to have the lowest monthly rates but higher-cost-sharing.)

According to the Kaiser Family Foundation, to qualify for the premium tax credit for 2022, American citizens and legal residents must meet the following criteria:

  • Your total household income is at least equal to the federal poverty level, based on 2021 guidelines.
  • You do not have access to affordable health insurance through your employer or a family member’s employer.
  • You are not eligible for public assistance programs like Medicare, Medicaid, or the Children’s Health Insurance Program.

And if you are married, you and your spouse must file joint tax returns.

Documented immigrants can also qualify for the tax credit if their household income is below the federal poverty level. They should also meet the other criteria.

There are exceptions for people who live in the 12 states without expanded Medicare under the Affordable Care Act. In those states, only adults with incomes at the federal poverty level can use the tax credits. Adults with lower incomes may not qualify.

Is health insurance tax deductible? The Bottom Line

In short, your health insurance policy payments are tax-free at the federal and state level if you use your employer’s health insurance. However, there are different criteria for the self-employed.

Ultimately, be aware of your health insurance and tax situation because you could save money on your health insurance every year. Also, keep abreast of the Medicare, Medicaid, and Marketplace rules in your state.

Since you now know whether your health insurance is tax-deductible, are you ready to look at health insurance rates from top companies in your area? Just enter your ZIP code into our free quote tool below and get started.

Free Insurance Quote Comparison

Enter your ZIP code below to compare cheap insurance rates.

 Secured with SHA-256 Encryption