Health Insurance Premiums and the IRS

With the economy failing and many organizations having to close their doors, healthcare insurance is getting more costly and many people wonder whether they can deduct any of their healthcare insurance premiums from their income tax.

Whether you can deduct your health insurance premiums on your income tax is a somewhat complicated situation because the answer to the question is it depends. Most of the time premiums are not deductible unless you are self-employed. This is because in most cases if you have healthcare through your employer, they are really paying for the premium.

Also, if you have a flex plan, the IRS doesn't allow this deduction because they the dollars that you put into this plan are non taxable. So, in essence if you received the deduction it would mean that you were getting two deductions instead of one.

On the other hand, you can deduct the portion you pay as long as it is not paid through a Flex plan or other savings account. If it is direct out of pocket expenses and your cost is more than 7.5% of your adjusted gross income you can deduct this portion.

For the self-employed insurance premiums are 100% deductable if they are more than 7.5% of their gross income, after adjustments as well. The premium can be in the individual's name as long as it is an expense that is paid for by the business.

If your employer pays for your premium you might also consider that there are medical costs that are associated with treatments that are tax deductible. According to the IRS, medical care expenses are those things that are used to help a mental or physical defect or an illness that go beyond the beneficial affects of things like vitamins.

In this situation medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care (IRS Publication 502). Some other examples of this type of medical expense include Again, the 7.5% rule applies but things like Acupuncture, artificial teeth, ambulance services and more are included in this deduction.

If all of this looks good to you it is also important to note that the only way this deduction is available to workers is if you itemize your deductions. This means that you would be using Schedule A to give the specific items that you are able to get credit for in your deductions.

However, if you are self-employed you can deduct your premium and expenses and you don't have to itemize. No one really knows why the IRS makes this distinction but this is what they have decided.

The best thing to do if you are unsure of whether you have enough expenses to deduct or whether your premiums can be deducted is to check with a tax advisor who is knowledgeable about the IRS laws. Many CPA's are very savvy about these types of deductions and will help you find deductions that you have missed if you do your own returns.

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