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Deducting Health Insurance Premiums & Healthcare Expenses on Your Taxes

By Kira Botkin

doctor healthcare costsThe cost of healthcare has been growing much faster than inflation, and will likely continue that trajectory considering the changes implemented by the Patient Protection and Affordable Care Act. This unfortunate trend may leave you wondering if you have any recourse to save money and reduce the impact of costly healthcare at all.

Plus, if you are not currently covered by health insurance, you may be required to purchase it with the implementation of the individual health insurance mandate in 2014. Though some income groups will receive assistance to afford coverage, many won’t and will face a fine for not purchasing adequate coverage.

Fortunately, you may be able to effectively reduce your healthcare costs by taking advantage of the range of available healthcare-related tax deductions.

How to Claim Health-Related Tax Deductions

Through conventional deductions on Schedule A and a special tax break for self-employed workers, you can recover a lot of the money you’ve spent on health issues.

Schedule A

The most common and familiar method for lowering your tax liability due to health expenses is to itemize your deductions and include medical expenses on Schedule A. You can deduct qualified healthcare costs that are greater than 10% of your adjusted gross income (AGI). Though for many that income threshold is high, there are a range of expenses you can claim that qualify to meet it.

For example, if your AGI is $40,000 in 2013, then the 10% minimum would be $4,000. If your medical costs for the year are $5,000, then you can include the $1,000 difference in your itemized deduction for that year. If your medical expenses were less than $4,000, you won’t get any tax benefit.

Expenses that your employer or insurance company cover don’t count, and you can’t “double dip” your tax break by claiming deductions for anything you’ve paid for from your health savings account (HSA) or flexible spending account (FSA).

However, when you pay out of your own pocket, you can include all qualifying healthcare expenses you paid for yourself, as well as anything you paid for your spouse or your dependents. The key is to know every possible expense that can help you meet that 10% threshold. Start with these five, and talk with your accountant about more possibilities.

Health Expenses You Can Deduct

The full list of expenses that you can include is very long, and you can review every item on the IRS website. The five best ways to meet the 10% threshold are:

  1. Doctor Visits. Payments to any medical professional are deductible, and your primary physician isn’t the only one whose costs can be applied. Charges from nurse practitioners, chiropractors, osteopaths, Christian Science practitioners, psychiatrists, psychologists, and optometrists all fit the bill.
  2. Copays on Doctor Visits or Prescription Medication. The amount you pay out-of-pocket for copays is deductible; however, the portion that your insurance covers is not.
  3. Dental Treatment. Any dental work for prevention, diagnosis, or correction of oral issues is deductible, from cleanings, to x-rays, to fillings. However, cosmetic procedures, such as teeth whitening, aren’t eligible.
  4. Medical Equipment. If you need to buy devices such as blood sugar meters, or equipment such as a cane or wheelchair, you can include these expenses on your Schedule A as long as you have a justifiable medical need for the item.
  5. Eyeglasses, Contact Lenses, and Supplies. Your out-of-pocket costs for your glasses and contact lenses are deductible as long as you are using them to correct a vision problem. You can even deduct the cost of supplies for maintaining your glasses and contacts, including saline solution, enzyme cleaner, and cases. Eye exams are also deductible.

Can I Deduct Health Insurance Premiums?

Often, you can deduct health insurance premiums – but it’s not a simple clear-cut rule. For some plans, you can deduct your premiums, but you may face some limits. You can’t deduct anything that already gives you a tax break, and if you pay for your medical premiums with pre-tax money, then you can’t include the expense in your deductions.

Still, you can find plenty of premiums that you can deduct, including the following:

  1. Insurance Premiums. If you’re paying for individual health insurance out of your own pocket with no other tax break, you can deduct these expenses. However, if you’re part of a group policy through your workplace and you pay the premium with pre-tax money, you’ve already gotten your tax break – you can’t deduct the same costs twice. Additionally, if you participate in an insurance plan that covers medical issues and other services, only the portion of the premium that goes toward medical services counts toward your deduction. It may sound complicated, but your plan provider can break down the costs for you. If you’re ever unsure, consult your HR department, check your pay stub, or look to the deductible premium payments listed in box 1 of your W-2 Form.
  2. Medicare Part A Premiums. You can only deduct Medicare Part A premiums if you are not covered by Social Security. Technically, under Social Security, the amount you pay for Medicare Part A is considered a payroll tax – it is not considered a medical expense. For example, some government employees are only covered by a pension plan, and in that case Medicare Part A premiums are deductible.
  3. Medicare Part B Premiums. If you choose to enroll in Medicare Part B, the premiums you pay are qualified medical expenses that you can deduct. Your Medicare B premium amount shows up on your Social Security statement.
  4. Medicare Part D Premiums. Medicare Part D premiums are deductible.
  5. Long-Term Care Insurance Premiums. In order to deduct premiums paid for a long-term care insurance policy, the policy must be considered a qualified long-term care policy. Your insurance agent can let you know whether your plan is classified as qualified. However, you are limited in how much you can deduct, depending on your age. If you and your spouse are both on a policy, you can each deduct the amount that corresponds to your age (these are 2013 limits):
    • Age 40 or under: $360
    • Age 41 to 50: $680
    • Age 51 to 60: $1,360
    • Age 61 to 70: $3,640
    • Age 71 or over: $4,550

healthcare pills

Health Expenses You Can’t Deduct

Even if a medical professional recommends them, you still can’t claim certain things, including:

  1. Nonprescription Medication. Even if your doctor told you to quit smoking, your nicotine patches aren’t deductible. The same rule applies to aspirin and many other common over-the-counter drugs.
  2. Life Insurance Policies. Though you may need a life insurance policy, you can’t deduct the premiums. Policies that cover injury, hospitalization, and accidental blindness or loss of limb aren’t deductible either.
  3. Funeral Expenses. Only expenses for the living are considered medical expenses. Funeral and cremation services are not deductible.
  4. Childcare for Healthy Children. While some childcare for ill or disabled children can be categorized as a medical expense, regular childcare for children who do not require special assistance isn’t deductible as a medical expense. You may be able to deduct it using the child care tax credit, however.
  5. Health Club Dues. You may be able to get reimbursed from your health insurance company, but you can’t deduct gym payments as medical expenses. Still, consider how much you’ll save in medical expenses by going regularly.
  6. Marijuana and Other Substances Illegal at the Federal Level. It is legal in many states to purchase marijuana if prescribed by a doctor. But the IRS uses federal law. In other words, you can’t get a tax break on state-sanctioned use because the Federal Government still classifies it as illegal.

Taking Advantage of Timing and Filing Status

Even if you end up using a payment plan or spreading out your healthcare costs with a credit card, the IRS allows you to deduct healthcare costs in the year in which you make the payment. Thus, if you know you’ll have a lot of expenses back to back, you might benefit by clumping them into one year and getting the tax break, but paying them off over time.

Also, if you are married, and one spouse has a large amount of medical expenses but a low income, you might be able to get a greater benefit by filing as married filing separately. Since 10% of the lower income is less than 10% of your incomes combined, you could potentially deduct a much larger portion than if you file as married filing jointly. Since you would both have to itemize, however, check with an accountant first to see what the total effect would be.

Finally, unusually high medical expenses are a flag for a tax audit, even if they are 100% legitimate. Protect yourself in case of an audit by retaining tax-related receipts for at least seven years.

Tax Break for Self-Employed Workers

If you don’t work for a company that gives you access to a large-group plan, health insurance premiums can be downright unaffordable. However, self-employed workers can deduct health insurance premiums as an above the line deduction on Form 1040.

To take this deduction, total the healthcare premiums paid during the year for yourself, your spouse, and dependents and use the Self-Employed Health Insurance Deduction Worksheet (included in the Form 1040 Instructions) to figure out the amount you can deduct. Once calculated, enter that amount on line 29 of Form 1040.

Final Word

Healthcare costs can be steep, especially if you’re self-employed, but with a little planning and preparation, you can cut those costs by saving on your taxes. You might have to strain your budget throughout the year, but at least your bottom line can even out when you get your refund.

Are you planning to take advantage of these tax breaks? What kinds of medical costs have you deducted in the past?

Kira Botkin
Kira is a longtime blogger and serial entrepreneur who enjoys gardening, garage sales, and finding stray animals. She lives in Columbus, Ohio, where football is a distinct season, and by day runs a research study for people with multiple sclerosis. She hopes that the MoneyCrashers team can help you achieve your goals and live a great life.

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  • Wallace404

    What if I finance the cost (like hear aids) over 3 years. Can I deduct the full price in the year I financed it?

    • Kira Botkin

      Yes, you can deduct the full price in the year you paid for it unless it is a situation where you don’t get the product until you pay for it in full – but as long as you actually receive the product in that year you can deduct the cost. The IRS doesn’t need to know how you paid for it as long as you did receive the item and are using it appropriately.

  • Santique33

    If one receives SSI along with son totaling 16,000 a year but has between$3,000 – $4000 in out of pocket Medical Expenses (which is 1/4 of their income) ,aren’t they
    able to recover most of this back as being deemed
    low income along with being disabled ?

    • Kira Botkin

      Getting a deduction doesn’t mean you get the money back. Taking a deduction for medical expenses means you reduce your taxable income, so you could potentially reduce your taxable income to zero and get back all the taxes you’ve paid for the year, but you don’t get back the actual amount you paid for the medical expenses.

  • Happy

    I am working on W2 with a company who does not offer any health insurance benefits, and I purchase directly with the health-care provider and pay 100% premium out of my pocket. Can I claim that as deductions in my return? (Ealier while I was a Full Time Employee of a company who did provide health insurance, I used to see the premiums subtracted as pre-tax amount)

    • Kira Botkin

      Yes, if you’re paying for it with post-tax money, you can deduct it on schedule A.

  • Justthinking

    I have found no answer to this question and I know that I am not the only spouse of a spouse, that is self-employed. Question: My spouse pays my “six digit insurance every month” (2007-2013); we have been told that we can’t use the premium as a tax deduction because it is for myself and not my spouse who is self employed. We did own two individual policies and now he is retired and I still have a few years to go before “I” can get on Medicare. To my knowledge, we have never been able to use my insurance premium on our end of year taxes. But yet, these people having children get a large sum of money back because they have children to raise. I know of a couple with two children and they have only worked a half year; if that, and they got back over $7,000.00 in refunds. Government is penalizing people who try to do the right thing and giving our hard earned dollars to some that sit around thinking of ways to get a hand-out!

    • Kira Botkin

      If you’re filing as married filing separately, then no, your spouse can’t take deductions that legally belong to you. Perhaps filing as married filing jointly would work out better.

      But I’m not sure why he actually has to make the purchase for you. If you have a joint bank account and you actually make the purchase, it would then become your deduction.

      I’m also not clear what children have to do with your inability to deduct your health insurance premiums. Besides, if no one has children, who is the government going to tax to pay for your Medicare?

  • Papawstew

    What are the rules for a Public Safety Officer taking deductions for health insurance premiums that are taken out of my pension check. I think I am allowed to deduct up to $3000 . I am being audited for this. I need a form or a rule number..

  • Gary

    Can a C Corporation take a tax deduction for health insurance payments for employees through the government health exchange if the employees choose an individual plan?

  • Lostmonkey

    If I pay for long term care insurance for my parents, can they claim the long term care premium deduction?

  • Pam

    If you’re married can you file married filing separate with Obamacare?

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