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Is Heath Insurance Deductible on Income Tax?

With the cost of health insurance rising more every year, many people are trying to save money whenever and wherever they can. If you buy your health insurance plan on the individual market, you might be able to take a deduction on your taxes. But you need to be careful, since taking a deduction you are not entitled to could land you in hot water with the IRS.

  1. Group Plan

    • If you have a group health plan through your employer, you cannot take a tax deduction for the amount you spend out of pocket on your health care premiums, unless the total of your premiums and other medical expenses exceed 7.5 percent of your adjusted gross income. Similarly, you cannot buy an individual health care plan and take a tax deduction while you are eligible to participate in a group health care plan. If you have access to a health care plan through your employer, it is probably best to use that plan, since the premiums tend to be much lower and part of the cost is borne by the employer.

    Individual Plans

    • If you buy your health care policy on the individual market, you might be able to take a deduction for that purchase. This can be a big tax savings for self-employed individuals, small-business owners, independent contractors and consultants. Those individuals and business owners are eligible to take the deduction as long as they are not eligible to participate in a group health plan. So if you have access to a group plan through your employer or your spouse's company, you cannot take the deduction until that eligibility ends.

    Health Savings Accounts

    • If you buy your health care plan on the individual market, you might be able to save money on premiums by choosing a high-deductible health plan. You can couple that high-deductible health plan with a health savings account, or HSA, and save even more money. You can deduct the amount you contribute to an HSA from your taxes, even if you do not itemize your deductions. For 2011, you can contribute up to $3,050 to an individual HSA or $6,150 to a family plan. The IRS reviews those limits each year and reviews them as necessary, so always check the limits before you make your annual contribution.

    Changing Rules

    • The IRS rules concerning the deductibility of heath insurance are always subject to change, so it pays to check with the IRS or your accountant before you start planning your tax strategy. Never make any changes to your health insurance based solely on tax implications before first checking with a tax expert or CPA.

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