It’s the start of the new year and that means it’s tax season once again. One of the best ways to save on taxes is to take advantage of all the deductions available to you.
Deducting the cost of your health insurance is one area to look into if you want to decrease the amount you have to pay to Uncle Sam. Medical care and health insurance can be expensive, so you’ll appreciate any deduction that you can get from them.
Before you can claim a tax deduction on your health insurance, you must meet certain qualifications. Let’s take a closer look at these requirements.
The 10 Percent Rule
You can claim health insurance premiums as a tax write-off for medical expenses. If your total medical expenses are greater than 10 percent of your adjusted gross income, you can claim the difference as a deduction.
You have a choice between itemizing your deductions or claiming the standard deduction, but not both. Most taxpayers prefer the standard deduction for convenience, but itemizing may give more returns.
A medical expense qualifies as an itemized deduction if it was used in the diagnosis, cure, mitigation, treatment, or prevention of an illness or condition of any part or function of the body. This includes medical services, medication, equipment, and health and dental insurance.
These expenses are eligible only if they are not reimbursed by your employer. This brings us to the next part.
Are You an Employee?
If you have an employer, you cannot claim tax deductions on items that your employer paid for, including health insurance. If your employer compensates you for only a portion of your insurance, you may be able to claim a health insurance deduction for the part you paid.
There is also a difference between a tax deduction and pre-tax deduction. Pre-tax is not eligible for further deductions. If you look at your paystubs and see that the deductions for insurance are taken out of your paycheck before income taxes are calculated, you used pre-tax money.
Even if your health insurance comes from pre-tax dollars, you might be in a more advantageous situation. Anything that can reduce your taxable salary will reduce the amount that you must fork over for income tax, Social Security tax, and Medicare tax.
Using pre-tax salary is another way your employer can help you cover your health expenses. Setting-up a Flexible Spending Account (FSA) is one example. You contribute money to the account (up to $2,600), and then you can submit medical expenses for reimbursements. The downside is that you have to use the amount you put into the FSA within the year or lose it.
Health Savings Accounts (HSA) are pre-tax savings account like FSA. Unlike FSA, funds from HSA can be withdrawn at any time and are not subject to forfeiture. But you must have a high-deductible health insurance plan to qualify for HSA.
Are You Self-Employed?
If you are self-employed, and not eligible for an employer-sponsored plan through your spouse, you can write off your health insurance premiums on your taxes. This is done as an above-the-line adjustment to income on the first page of your Form 1040.
The deduction that you can get is not limited to the 10 percent of adjusted gross income rule. You can claim the entire amount that you spent on your premiums, but you can’t add any uninsured costs.