Tax Rules for Health Plan Insurance Premiums
If you pay substantial out-of-pocket health care expenses, you may be able to translate these costs into big savings at tax time. The Internal Revenue Service allows taxpayers to deduct certain medical and dental expenses, including the cost of health insurance premiums. If you're paying for health insurance for yourself or someone else, you need to understand what the guidelines are for claiming the deduction.
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What Is Deductible
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Your ability to claim a deduction for health insurance premiums is determined by your income and the total amount of your expenses. According to IRS Publication 502, you may only deduct the amount of your medical and dental expenses that exceeds 7.5 percent of your adjusted gross income. You cannot claim the deduction for pre-tax health insurance premiums paid through an employer-sponsored group health plan. The deduction is also not available for premiums paid for policies that provide reimbursement for expenses other than health care, such as lost wages or payment for permanent disability.
Qualifying Individuals
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You must pay health insurance premiums for yourself or a qualifying individual in order to be eligible for the deduction. The IRS allows you to claim the deduction for your spouse or anyone who qualified as a dependent at the time the health insurance premiums were paid. A qualifying dependent may include your child, parent or other relative who lives with you at least half the year and depends on you for at least half of his financial support. You may also claim the deduction if you pay premiums for someone who would qualify as your dependent but files a joint return or has a gross annual income in excess of $3,650.
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Self-Employed Individuals
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The guidelines for deducting health insurance premiums vary slightly if you're self-employed. According to IRS Publication 502, you may claim the deduction for premiums paid for yourself, spouse or dependents on a month-by-month basis only. If you or your spouse were eligible to participate in an employer-sponsored health insurance plan in any given month, you cannot deduct health insurance premiums paid during the same time frame. The IRS also prohibits you from deducting health care expenses in excess of your business's earned income, which means that if your business fails to turn a profit, you cannot deduct health insurance premiums for that tax year.
Long-Term Care Premiums
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The IRS also allows a deduction if you pay premiums for long-term care insurance. To qualify, you must have a long-term care insurance contract, which must be guaranteed renewable. The policy must not provide any cash value or refund or reimburse any expenses that would ordinarily be covered under Medicare. The amount of long-term care insurance premiums that are deductible is based on your age. As of 2010, the maximum deductible amount was $4,110 for individuals aged 70 and older. Individuals aged 40 or younger could only deduct a maximum of $330 in premium expenses.
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References
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