Writing a sizable check for your health insurance premiums every month can add up considerably by year's end. It's no wonder taxpayers zero in on such costs when they're looking for deductions they might qualify for. The Internal Revenue Service allows deductions for insurance under some circumstances, but whether it will help you much at tax time depends on several factors.
The IRS gives you a choice regarding deductions. You can itemize, listing every qualifying item you paid for during the year, or you can claim the standard deduction instead. You can't do both, so most taxpayers choose the option that reduces their taxable income the most. As of 2012, the standard deduction if you're single is $5,950, or twice that if you're married and file a joint return. If you're married and file a separate return, you can't itemize unless your spouse does so also. Therefore, because health insurance is an itemized medical deduction, you can't claim it if your spouse claims the standard deduction.
If you itemize, you'll need a lot of qualifying medical expenses to make it worth your while. Fortunately, medical deductions include more than just insurance premiums. You can deduct unreimbursed fees and prescriptions as well – generally for any diagnosis or treatment or even for dental care. When you add up all your costs, you must then subtract 7.5 percent of your adjusted gross income, and this increases to 10 percent as of 2013. You can only deduct the difference. For example, if all your medical costs, including health insurance premiums, come to $14,000 a year, and if 7.5 percent of your AGI is $15,000, you can't claim the deduction – the percentage of your AGI exceeds your medical costs. If 7.5 percent of your AGI is $13,000, you can deduct $1,000. When totaling your medical costs, you can't include over-the-counter medications, cosmetic surgery, smoking cessation aids you buy without a prescription, or costs for which your insurance company reimburses you. Depending on your other itemized deductions, you may be better of claiming the standard deduction instead.
You might have a hard time reaching the required percentage of your AGI if your employer contributes to your health plan as part of your compensation package. You can't deduct the portion your employer pays unless it appears on your W-2 as income. In some cases, you can't even deduct what you pay toward an employer-sponsored policy, such as some federal government benefits packages.
The rules change considerably if you're self-employed. In this case, you can claim your health insurance premiums as a deduction without itemizing. You're free to take the standard deduction and subtract your insurance premiums too. This deduction appears above the line, on page 2 of your Form 1040, along with other calculations, to determine your AGI. Other medical costs don't count toward this deduction; you can use only what you pay in health insurance premiums. You also can't take the deduction if you're eligible for coverage under any other plan, such as if your spouse has a policy as a perk of her employment. Your deduction for premiums can't exceed your income. If your business shows a loss on your Schedule C, you can't claim a deduction for your health insurance premiums.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.