Now that tax season is here again, many people are left wondering about the potential tax benefits of their health insurance. The prospect of deducting health insurance premiums from taxes can be a significant financial incentive for individuals and families.
But navigating the complex landscape of tax deductions, especially when it comes to health-related expenses, can be daunting. In this guide, our independent agents at McKnight & McKnight Insurance Solutions explain what you need to know to make the most informed decisions as you prepare your taxes. But when in doubt, always consult with an experienced tax professional so you can maximize your tax return.
Understanding Health Insurance Tax Deductions
The short answer is, yes, health insurance can be tax deductible—but it depends on several factors. Essentially, the IRS allows for the deduction of paid health care premiums under specific conditions.
Who qualifies?
- Self-employed individuals
- Those paying for health insurance premiums or an HSA without the assistance of their employer
- Those on Medicare
- Those with high medical expenses
It’s important to note that rules vary and are subject to change, which means it’s crucial to stay up to date with current tax laws or consult a tax advisor if you are unsure.
Let’s break it down:
- Employer-sponsored health insurance: Yes, generally tax deductible. Often, the amount paid by employees is deducted automatically from their taxable income.
- Self-employed health insurance: Yes, it is tax deductible. Self-employed individuals can generally deduct 100% of their health insurance premiums.
- Private health insurance: It may or may not be tax deductible. If your premiums exceed 7.5% of your Adjusted Gross Income (AGI), you can deduct the amount that exceeds this threshold.
- HSAs: The contributions you make to your Health Savings Account or HSA are 100% tax-deductible. However, there are some limits to keep in mind.
- Medicare: Yes, generally tax deductible. Premiums for Medicare Parts A, B, C, and D are tax-deductible. However, this is subject to the 7.5% AGI rule.
- Medicaid/CHIP: These are generally not tax-deductible.
Now, let’s discuss some of these a little further.
Employer-Sponsored Health Insurance
Employer-sponsored health insurance refers to health insurance coverage provided by your employer. The majority of the workforce receives their health insurance coverage this way. The cost of employer-sponsored coverage is usually split between the employer and employee, with the employee’s share removed from the paycheck before taxes.
When it comes to the premiums you pay for employer-sponsored coverage, they are mostly payroll deducted before tax. This means less of a bite out of your paycheck and potentially substantial savings come tax season.
Self-Employed
If you’re self-employed, you can typically deduct 100% of your health insurance premium costs from your adjusted gross income.
As a self-employed individual, it’s important to note that you can only deduct the net amount you pay for premiums. This means, that if you’re fortunate enough to receive a subsidy, it’s only the amount you pay after this subsidy is applied that can be considered for a tax deduction.
“When I opened my private practice last year, I needed affordable coverage for my family and myself. I met my insurance agent Bob McKnight through a networking group and highly recommend him! He specializes in helping self-employed individuals. Bob was able to provide me with excellent coverage at a very reasonable price.”
-Dawn W.
Health Savings Accounts
If you’ve been contributing to a Health Savings Account (HSA), you might be wondering about the tax implications. The contributions you make to your HSA are 100% tax-deductible. However, there are some limits to keep in mind.
For the year 2023, you can deduct up to $3,850 if your High Deductible Health Plan (HDHP) covers just yourself. But if your plan also covers at least one additional family member, the deductible limit goes up to $7,750.
For 2024, the tax-deductible limits are set to increase. Single coverage will allow for a deductible of up to $4,150, while plans covering at least one additional family member can deduct up to $8,300, respectively.
- Employer-Sponsored HSAs: As a rule of thumb, if you fund your HSA through payroll deduction, the contributions will be made on a pre-tax basis, which will noted on the W-2 you receive at the end of the year.
- Self-Funded HSAs: If you are the one funding your HSA, you will record the amount you contribute each year and deduct it from your income on your tax return. If you are self-employed, you can also deduct the premiums for your HDHP, just like you can for any other health insurance.
Marketplace Insurance
If you or your family had a Marketplace plan in 2023, you should receive Form 1095-A, or your Health Insurance Marketplace® Statement by mid-February 2024.
Form 1095-A contains information regarding Marketplace plans that any member of your household had in 2023 including:
- Premiums paid
- Any premium tax credits used
If you are working with an accountant or tax preparing service, make sure to give them Form 1095-A to ensure you get any tax deductions that you are entitled to.
Read More > How Can I Get the Most Out of My Health Insurance Plan?
Navigating Health Insurance
Navigating health insurance deductions can be complex and overwhelming, which is why we always recommend clients to consult with an accountant or a tax professional to ensure they are getting the deductions they deserve.
If you need to make any changes to your health plan for 2024, or want to know if you are eligible for a Special Enrollment Period, contact McKnight & McKnight today! We’re here to help!
Disclaimer: At McKnight & McKnight Insurance Solutions, our independent insurance agents do not offer accounting, legal, or tax advice. This article is meant primarily for informational reasons; it is not meant to be used as a source of tax, legal, or accounting advice, nor should it be relied upon in that regard. Before making any decisions, you should speak with your own tax, legal, or accounting professionals.
