Are Health Insurance Premiums Deductible?

Health insurance premiums are a significant financial outlay for many. Deducting these premiums can reduce taxable income, but the rules vary based on individual circumstances and coverage type. Understanding these distinctions is important for managing tax obligations and identifying potential savings. Deductibility depends on factors like employment status, premium type, and payment method.

General Rules for Individual Deductions

Individuals not self-employed or receiving employer-sponsored health insurance (or whose employer-provided premiums are already pre-tax) may deduct health insurance premiums. This deduction is claimed as an itemized deduction on Schedule A (Form 1040). Premiums qualify as medical expenses.

A limitation for deducting medical expenses, including health insurance premiums, is the Adjusted Gross Income (AGI) threshold. Taxpayers can only deduct the amount of medical expenses exceeding 7.5% of their AGI. For example, if an individual’s AGI is $50,000, only medical expenses above $3,750 (7.5% of $50,000) are deductible. This means significant out-of-pocket medical costs must be incurred before any tax benefit is realized.

IRS Publication 502 provides guidance on deductible medical expenses, including premiums for medical and dental coverage. However, premiums paid through pre-tax payroll deductions by an employer cannot be deducted again by the employee, as they have already received a tax benefit. Maintaining thorough records of all medical expenses and premium payments is important for substantiating any claimed deductions.

Rules for Self-Employed Individuals

Self-employed individuals may deduct 100% of health insurance premiums paid during the year. This “above-the-line” deduction reduces their Adjusted Gross Income (AGI) directly, offering a greater benefit than an itemized deduction. It is reported on Schedule 1 (Form 1040) and can be claimed regardless of whether the individual itemizes or takes the standard deduction.

To qualify, individuals must have a net profit from their business, such as sole proprietors, partners, or members of a multi-member LLC taxed as a partnership. Shareholders owning over 2% of an S corporation who receive wages may also qualify. A condition for this deduction is that the self-employed individual, or their spouse, cannot be eligible for an employer-sponsored health plan. If eligibility for such a plan exists for any month, the deduction is disallowed for that month.

The deduction cannot exceed the self-employment income from the business. For example, if premiums are $10,000 but net profit is $8,000, the deduction is capped at $8,000. This deduction covers premiums for the taxpayer, spouse, dependents, and non-dependent children under age 27 at year-end.

Rules for Business Deductions

Businesses, as employers, deduct health insurance premiums paid for their employees as a business expense. This applies to C corporations, S corporations, and partnerships. For C corporations, premiums paid for employees, including owner-employees, are deductible by the corporation and excluded from the employees’ taxable income.

S corporations also deduct premiums for employees, but for shareholders owning over 2% of the company, these premiums are treated as taxable wages on their Form W-2. This allows the shareholder to claim the self-employed health insurance deduction. For partnerships and sole proprietorships, premiums paid for employees are deductible business expenses. However, for owners (partners or sole proprietors), premiums are handled under self-employed health insurance deduction rules, not as a direct business expense.

When employees pay premiums through pre-tax payroll deductions, these amounts are non-taxable benefits to the employee, and the employer receives a deduction by reducing taxable wages. Offering health insurance can also provide tax credits for small businesses, reducing the net cost of coverage. For example, the Small Business Health Care Tax Credit, available to eligible small employers, can cover a portion of premiums paid. This credit can be up to 50% of the employer’s contribution towards employee premiums, depending on business size and average wages. Even when claiming this credit, eligible small businesses can still deduct premium amounts exceeding the credit as a business expense.

Qualified Long-Term Care Insurance Premiums

Premiums paid for qualified long-term care insurance contracts can be included as medical expenses for tax deduction purposes. A contract is considered “qualified” if it meets federal requirements, such as being guaranteed renewable, not providing a cash surrender value, and covering qualified long-term care services for chronically ill individuals. These services include diagnostic, preventive, therapeutic, and rehabilitative care, or personal care services for chronically ill individuals.

The deductibility of these premiums is subject to age-based limits, adjusted annually by the IRS. For example, for the 2024 tax year, the maximum premiums includable as medical expenses range from $470 for individuals age 40 or younger to $5,880 for those age 71 or older. These limits apply to the amount included as a medical expense, not the amount ultimately deductible.

Once the qualified amount is determined, it is treated like other medical expenses. Individuals deduct these as an itemized deduction on Schedule A, subject to the 7.5% AGI limitation. Self-employed individuals can include these qualified premiums in their self-employed health insurance deduction, subject to their self-employment income limit.

Medicare Premiums

Medicare premiums are considered medical expenses for tax purposes, allowing for potential deductibility. This includes Medicare Part B (medical insurance), Part D (prescription drug coverage), Medigap (Medicare Supplement Insurance), and Medicare Advantage (Part C) premiums.

Medicare Part A (hospital insurance) premiums are not deductible because most individuals pay for Part A through payroll taxes. However, if an individual voluntarily pays for Part A premiums, which is uncommon, these premiums can be deductible. This applies if they are not covered under Social Security.

Once identified as qualifying medical expenses, Medicare premiums follow the general rules for medical expense deductions. Individuals include these premiums when calculating their itemized medical expense deduction on Schedule A, subject to the 7.5% AGI threshold. Self-employed individuals can include Medicare premiums in their self-employed health insurance deduction, provided they meet the eligibility criteria.