Self-employed taxpayers can deduct 100 percent of their insurance premiums.
With health insurance premiums steadily rising, even outpacing inflation at times, many people struggle to afford expensive health insurance premiums. Thanks to provisions in the federal tax code and the Affordable Care Act, some taxpayers may be able to deduct all or a portion of the health insurance premiums they pay during the course of each fiscal tax year.
Small Business Owners
The passage of the Affordable Care Act encourages small-business employers to provide group health insurance benefits to employees. To qualify for tax benefits, employers must pay at least half of each eligible full-time employee's health insurance premiums, excluding extended coverage for the employee's spouse or dependents. Small-business owners who comply with these guidelines may claim a tax credit for up to 35 percent of the premiums paid for employees each year until 2014, when the credit grows to 50 percent. The IRS defines a small business as a business with fewer than 25 full-time employees paid no more than $50,000 per year on average.
Group Health Insurance
Anyone insured under an employer's group health insurance plan can pay his premiums federally tax-free. Most employers deduct the amount of each employee's health premiums from the employee's gross pay each pay period. Once health premiums are paid, the employee's remaining earnings are subject to federal tax withholding. Not only does this tax benefit make health insurance more affordable to employees, but it also lowers the employee's taxable income each year, resulting in a lower tax bill and possibly a lower tax bracket.
Self-Employment
Self-employed individuals without access to a spouse's group health insurance plan must purchase health insurance on the private market. Premiums are typically more expensive than those available through group coverage plans, but like employer-offered plans, private insurance premiums for the self-employed are tax-deductible. By adjusting quarterly estimated tax payments to the IRS, self-employed individuals can find immediate tax relief from high insurance premiums.
Private Insurance
The remaining portion of Americans who are not self-employed and cannot access an employer's health plan cannot deduct the cost of health insurance premiums on federal income taxes. However, they can deduct the amount of annual medical expenses, including health insurance premiums, that exceed 7.5 percent of adjusted gross income.
Options
Regulations in the Affordable Care Act make it possible for adults up to age 26 to remain on a parent's health insurance policy as a dependent. Adult children do not have to live at home with their parents, nor do they need to be financially dependent on their parents to qualify. In fact, even married adult children younger than 26 can qualify for coverage, though the adult child's spouse and children are not eligible for coverage under the law. Other options include COBRA coverage for the recently unemployed and Medicaid for low-income families. Under COBRA, qualifying individuals can extend health insurance coverage from a previous employer by paying 100 percent of the premiums himself. Medicaid, on the other hand, is a state and federally run program that provides comprehensive health benefits to low-income families and the disabled. Eligibility guidelines vary by state.
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