Is private health insurance tax deductible?

Like many things in life, health insurance is an investment, and it’s not just about the money. Over the years, people have become more aware that getting health insurance early in life results in fewer deaths, better health outcomes, and increased productivity — things you can’t put a price on (though we’ll try).

According to the Kaiser Family Foundation, annual health insurance rates average $7,739 for individuals and $22,221 for families in 2021. Since 2011, average family insurance rates have gone up by almost 47%. In other words, all this great coverage comes at a cost in every literal sense of the word.

Fortunately, if you’re in the U.S., you may reduce your health care costs by claiming insurance rates on your tax forms. This article will explore the circumstances under which you can deduct taxes from private health insurance. We’ll show you how to do it and what requirements you’ll need to meet.

What is the definition of private health insurance?

Private health insurance is insurance purchased from a private company or through a union or employer plan. The private health insurance market consists of private health insurance companies and health maintenance organizations.

Private health insurance plans are not the same as government-sponsored health care coverage such as Medicare or Medicaid, which is public insurance.

If you need coverage, make sure to shop around for private health insurance quotes from multiple companies before choosing a policy.

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Is private health insurance tax deductible?

The vast majority of private health insurance policies are tax deductible. Your health insurance rates are medical expenses for tax purposes, and anyone can claim the deduction. You can deduct expenses related to yourself, your spouse, and your dependents.

If you pay out-of-pocket, health insurance rates qualify as medical expenses that you can deduct from your taxes.

Whether your health insurance is tax deductible depends on where you live and your income.

Qualifying for Private Health Insurance Tax Deductions

Tax deductions are subject to certain conditions, including the type of health care services you receive, the amount you spend, and your adjusted gross income. Claiming tax deductions for health insurance isn’t as easy as it might seem because of these requirements.

Consider the following factors when determining your eligibility for a tax deduction on your private health insurance.

Adjusted Gross Income (AGI) Threshold

The IRS usually allows you to deduct eligible medical expenses and health insurance costs up to 7.5% of your adjusted gross income. This deduction covers health insurance rates and out-of-pocket expenses for visits to a clinic, surgeries, dental, or mental treatment.

AGI is a modified version of your gross income. It’s what you earn in wages, dividends, capital gains, rental income, and other sources minus things like contributions to a traditional IRA, alimony, and student loan interest.

You can calculate the 7.5% rule by tallying your medical expenses and subtracting the amount, equaling 7.5% of your AGI.

Suppose you have an AGI of $50,000; in that case, your threshold would be $3,750, or 7.5% of $50,000. So, if you incurred $10,000 worth of medical expenses, you can deduct $6,250 from that total.

Do not include reimbursed expenses when you calculate, such as premium tax credits provided by the Affordable Care Act. You can only make a deduction for expenses that a third party hasn’t paid or reimbursed. If you didn’t pay directly for the expenses, you can’t claim a deduction.

AGI Exception for Self-Employed Individuals

Business owners or self-employed individuals are exempt from the 7.5% rule.

You can deduct health insurance rates from your earnings if you are self-employed, lowering your taxable income. You can possibly deduct up to 100% of your health insurance rates. The deduction applies to health coverage for you, your spouse, dependents, and any non-dependent child under 27. Many freelancers and sole proprietors consider this one of their most significant expense deductions.

However, this deduction may not apply if you are:

• Enrolled in another employer’s plan
• Entitled to enroll in another employer’s plan but opt not to
• Covered by employer-sponsored health insurance through a spouse’s employer

Regardless of how many businesses you own, you may deduct self-employed health insurance only for one of them, so you cannot combine income from multiple businesses to claim the maximum deduction. The best course of action would be to use the company with the highest net income.

Employer-Sponsored Health Insurance

It’s possible that you already pay no taxes on your private insurance or medical expenses. This applies if, for example, your employer reimburses your insurance costs through payroll deductions.

Your employer automatically excludes such reimbursements from your gross income, and they do not get taxed under federal and state tax laws. Effectively, you cannot claim another tax deduction for your health insurance coverage at the end of the year.

When should I itemize medical tax deductions?

Before you claim tax deductions on your yearly return to the IRS, you should decide whether you will take the standard tax deduction or itemized deduction. These two factors ultimately decrease your adjusted gross income and reduce the amount of taxes you owe. However, depending on the situation, one may be more cost-effective than the other.

Standard deductions reduce your AGI by a flat dollar amount. The amount depends on your income, age, and filing status and is the most straightforward method of calculating your taxes and deductions. However, if you take this deduction form, you can’t itemize your deductions.

You may be entitled to different tax deductions for different expenses throughout a tax year. Sometimes, the standard deduction can exceed these deductions and is where itemizing on your tax return can significantly impact your tax bill. Your financial situation will ultimately determine whether you itemize or take the standard deduction.

In general, you want to itemize when:

• Your total deductions exceed the standard deduction
• You pay mortgage interest and property taxes
• You make significant charitable contributions
• You suffered a significant loss not covered by insurance

You can find more information on the IRS website, which has a tool you can use to see if you can deduct medical expenses. We also recommend that you refer to the Schedule A 1040 Form, which helps you compare the itemized expenses you have with the standard deduction.

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Types of Medical Care Expenses

Health insurance rates aren’t the only deductible medical expenses. You can deduct other expenses such as preventative care, treatments, surgeries, dental care, and vision care by itemizing your deductions. You can also deduct unreimbursed payments for prescription medications and appliances.

We’ve compiled a list of tax-deductible medical expenses and some that aren’t. The IRS provides all of this information here.

Tax-Deductible Medical Expenses

• Medical services provided by doctors, surgeons, and dentists to diagnose, cure, mitigate, treat, or prevent diseases
• Medication prescribed by a physician
• Medical equipment, supplies, and devices prescribed by a physician, such as eyeglasses
• The treatment must impair any bodily function or structure
• Transportation costs to and from medical treatment
• Services at long-term care facilities
• Medical or long-term care insurance

Non-Deductible Medical Expenses

• Burial or funeral costs
• Nonprescription medication
• Personal care products such as toothpaste and cosmetics
• Wellness trips or programs
• Cosmetic surgery
• No-prescription nicotine patches or gum

When are health insurance rates not deductible?

Health insurance rates are not tax deductible if you’re already receiving reimbursements from other sources. We have already covered some of these scenarios in detail, but as a recap, your private health insurance rates cannot get deducted if:

• Your insurance rates have been paid on your behalf with tax subsidies
• Your employer reimburses your insurance rates
• You’re enrolled in Medicare under Social Security

Final Note

So, is private health insurance tax deductible? The answer is yes — you can undoubtedly deduct the amount you spend on your health insurance rates.

However, some conditions apply. For example, you can only deduct taxes if your total health care costs exceed 7.5% of your adjusted gross income. Suppose you already receive reimbursement from your employer for private health coverage or medical expenses, such as a payroll deduction plan. In that case, your rates are likely already tax-free, and you won’t have to repeat the process.

If your expenses exceed your standard deduction amount, you can itemize deductions to save more on your taxes. Deductions for itemized medical expenses include treatment and medication expenses.

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