The IRS allows self-employed taxpayers to deduct health insurance premiums.
Although a majority of the U.S. population has health insurance through either an employer's group health insurance plan or through a government-sponsored health plan, just under 1 in 10 Americans purchases individual insurance privately. Private health insurance premiums are notoriously higher than group rates and have fewer tax benefits.
About
Unfortunately, unlike employer-offered group health insurance premiums, you cannot pay for private health insurance with pre-taxed income, and the premiums are not always tax-deductible. Instead, the IRS allows only self-employed individuals to deduct 100 percent of the premiums they pay for insurance to cover themselves, a spouse and dependents. If you are not self-employed, you must pay your health insurance premiums with taxable income.
Expenses
If you are not self-employed but still pay for your own private health insurance premiums, you can deduct part of your private insurance expenses on your federal income taxes. To benefit from the deduction, you must itemize, rather than take the standard deduction on your taxes. The value of the deduction is the equivalent of the total amount of your health insurance premiums and qualified medical expenses that exceed 7.5 percent of your adjusted gross income. In other words, if your adjusted gross income equals $100,000 and you have $10,000 in total medical and insurance expenses, you may deduct $2,500 on your federal income taxes.
Alternatives
Because you purchase private health insurance, you have the privilege of shopping around for a policy that best fits your needs. You may consider purchasing a policy that qualifies you and your family for a health savings account. These are non-taxable savings accounts that can be used to pay for qualifying health expenses only. Unfortunately, you cannot pay for your health insurance premiums out of the account, but all other expenses are eligible, including deductibles, coinsurance and copays. Furthermore, HSA-qualifying plans have lower monthly premiums than traditional plans, freeing up cash for contributions to your HSA account.
Future Tax Benefits
Though private health insurance policies do not have many tax benefits as of 2011, the enactment of a provision in the Affordable Care Act beginning in January 2014 will provide significant tax credits to many low- and middle-income taxpayers who purchase individual policies. The credit will be available for those with incomes too high to qualify for Medicaid and up to 400 percent of the federal poverty limit. Though the federal poverty limit changes on a regular basis, as of 2011, a family of four with an income of up to $88,000 would qualify for the credit.
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