Can I Count Health Insurance on My Taxes?

With health insurance premiums consistently rising at a rate that outpaces inflation and wage increases, many policyholders are at an escalated need for assistance in affording their monthly premiums. While individually purchased health insurance policies have the fewest tax benefits, others with insurance through work can pay for insurance with non-taxable income.

Non-Taxable Premiums

• The IRS allows two groups of taxpayers to deduct the cost of insurance from federal income taxes. Those who pay for health insurance through an employer's group health insurance plan can deduct 100 percent of insurance premiums. However, the IRS recognizes that self-employed individuals do not have access to an employer's group plan and instead must purchase private health insurance. The IRS treats self-employed taxpayers the same as employed taxpayers with respect to insurance premium taxation.

Private Insurance

• If you purchase private health insurance and are not self-employed, you cannot deduct your health insurance premiums on your federal income taxes. You can, however, deduct a portion of your out-of-pocket expenses for all other IRS-qualifying health expenses you pay out of pocket. The IRS allows taxpayers to deduct the sum of these expenses that exceeds 7.5 percent of your adjusted gross income. For example, if your adjusted gross income is $100,000 and you paid $20,000 for health expenses other than insurance premiums, you can deduct $12,500 for health expenses.

Alternative

• If the high cost of individual health insurance premiums and lack of a health premium tax deduction is squeezing your finances, consider switching your health insurance plan to an HSA-qualifying insurance policy. An HSA is a health savings account that people with qualifying high-deductible insurance policies can contribute to tax-free. The premiums for these insurance policies are lower than lower-deductible plans, and you can use the savings to contribute to your HSA tax-free. The funds in your account remain tax-free so long as you use them only to pay for IRS-qualified medical expenses.

Small Businesses

• If you are a small business employer who offers group health insurance to your employees, you may qualify for the Small Business Health Care Tax Credit, which pays you a tax credit of up to 35 percent of your expenses toward your employees' insurance premiums, as of 2011. To qualify, you must employ 25 or fewer full-time equivalent employees, and your average employee wages cannot exceed $50,000 annually. Beginning in 2014, the maximum credit available under the Small Business Health Care Tax Credit will increase to 50 percent.