If you're paying out of pocket for your health insurance or other medical expenses, you might be able to write off some of those costs on your tax return. However, only one medical tax deduction has the potential to reduce your income dollar for dollar and only self-employed taxpayers are eligible for it.
Self-Employed Insurance Premiums
If you're self-employed, you can usually write off your medical insurance premiums as an adjustment to income. The plan must be created under your business name. Not only is the deduction not subject to any dollar amount limitations, you also don't have to itemize to claim it. You can include medical premiums you pay for yourself, your spouse, anyone you claim as a dependent and your children under age 27, even if you don't claim them as dependents because they're too old.
You can write off the insurance premiums only to the extent they do not exceed your net self-employment profits for the year. For example, if your business had a bad year and you made only $6,000, you can't write off more than $6,000 of medical expenses. In addition, you can't deduct the premiums paid for any month that you were eligible to participate in an employer plan for yourself or through your spouse, dependent or child under 27 years old. For example, if you're eligible for coverage under your husband's employee plan, you can't deduct premiums paid even though you are self-employed.
Medical Expenses Deduction
The standard medical expenses deduction isn't a dollar-for-dollar deduction because only the expenses that exceed a certain percentage of your adjusted gross income are deductible. For 2012, the threshold is 7.5 percent, but it increases to 10 percent in 2013 and subsequent years. For example, if in 2013 your adjusted gross income is $51,000, the first $3,825 of your medical expenses wouldn't be deductible. However, once you exceed the threshold, additional expenses do decrease your income dollar for dollar.
The other limitation on the medical expenses deduction is that you have to itemize to claim it. Itemizing requires giving up your standard deduction, which might make it impractical to itemize. For example, if your total itemized deductions, including your medical expenses deduction, totals just $8,000 and your standard deduction is $10,000, you'll save more by not itemizing.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."