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Is Individual Health Insurance Tax Deductible?

According to the federal government's Healthcare website, the average health insurance premium purchased through an employer for a family of four was more than $12,600 annually in 2008. Employers usually assume part of these costs on behalf of employees, and the employee's remaining premium liability is usually tax-free. However, many Americans must purchase their own health insurance for lack of an affordable employer option. Unfortunately, most private health insurance premiums do not qualify for a federal tax deduction.

  1. Individual Insurance and HSAs

    • Some health insurance premiums are tax deductible. Unfortunately, privately-purchased health coverage is not deductible for most taxpayers. Though you must pay for private health insurance premiums with taxable income, if your insurance plan qualifies for a health savings account, or HSA, you may contribute funds to the HSA tax-free. You can use the HSA to pay for qualifying medical expenses as outlined on IRS Publication 502 (see Resources), including your plan's deductibles, co-pays and co-insurance.

    Tax Benefits

    • Though your health insurance premiums are not tax deductible, you may be able to deduct a portion of your annual medical expenses that were not paid from an HSA or other tax-exempt source. At the end of the tax year, total your overall qualifying medical expenses, including your health-insurance premiums. The amount that exceeds 7.5 percent of your adjusted gross income is deductible on your federal income taxes.

    Exception

    • The law makes an exception for self-employed individuals who do not have access to health insurance through an employer's group plan. Qualifying self-employed tax payers can deduct 100 percent of self-paid private health insurance premiums paid for themselves, a spouse and dependents. To qualify for the deduction, you must file Schedule C, C-EZ, F, K-1 or SE, or hold more than 2 percent of an S Corporation for the tax year.

    Future Changes

    • Beginning in January 2014, you may become eligible for a federal tax credit for individually-purchased health insurance. The tax relief is a product of The Affordable Care Act, a health reform bill passed in 2010. Under the law, taxpayers with incomes between 100 and 400 percent of the federal poverty limit will receive a tax credit to make health insurance more affordable. Only taxpayers without access to an employer's plan or a government subsidy, such as Medicaid, will qualify for the credit.

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