Paul Sanchez
If you have health insurance through the Health Insurance Marketplace, you may be able to deduct the cost of your premiums from your taxable income. The Health Insurance Marketplace, also known as the Exchange, is a way for eligible individuals and families with low or moderate incomes to purchase health insurance. The Premium Tax Credit is a refundable tax credit that helps lower the cost of monthly premiums. If you receive a subsidy or premium tax credit to purchase an insurance plan in the Health Insurance Marketplace, any advanced-payment subsidy that lowers the cost of your health insurance premiums cannot be claimed as a tax deduction. However, the money you pay out of pocket for your premiums might be tax-deductible.
| Characteristics | Values |
|---|---|
| Who can claim medical premiums? | Self-employed people, their spouses, and their dependents |
| What can you claim medical premiums for? | Medical, dental, and qualifying long-term care insurance coverage |
| What can't you claim medical premiums for? | Months when you or your spouse were eligible for an employer-subsidized health plan |
| What is the maximum amount you can claim for medical premiums? | The health insurance premium deduction can't exceed the earned income you collect from your business |
| What is the process for claiming medical premiums? | You must complete Form 8962, Premium Tax Credit, and file a federal income tax return |
| What is the benefit of claiming medical premiums? | It lowers your adjusted gross income (AGI) and reduces the odds of being affected by unfavorable phase-out rules that can cut back or eliminate various tax breaks |
| What is the impact of advance payments of the premium tax credit on claiming medical premiums? | If you received advance payments, you must reconcile them with the actual amount of the premium tax credit you are claiming on your tax return |
| What happens if you don't claim medical premiums? | You will be responsible for the full cost of your monthly premiums and may have to pay back some or all of the advance payments of the premium tax credit |
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What You'll Learn
Self-employed people can deduct medical premiums
If you are self-employed, you may be able to deduct the premiums that you pay for medical, dental, and qualifying long-term care insurance coverage for yourself, your spouse, and your dependents. This is known as the self-employed health insurance deduction.
To be eligible for this deduction, you must not have access to an employer-sponsored subsidized health insurance plan. This applies whether the employer in question is someone you or your spouse works for. If you are offered a subsidized plan by either employer, your health insurance premiums are not tax-deductible.
If you are single, you can claim the deduction for premiums paid during any months when you were ineligible for an employer-provided health plan. For example, if you left your job to start your own business, you can claim the deduction for the months when you were without employer-provided coverage. However, the deduction cannot exceed the earned income you collect from your business. If your self-employment activity generates a tax loss for the year, you are not allowed to claim the deduction because your business did not generate any positive income.
If you are a business partner or LLC member treated as a partner for tax purposes, you can deduct the health insurance premiums you pay directly. If the partnership or LLC pays the premiums, you can still claim the deduction for premiums paid for your coverage by following special reporting rules.
If you have a business and pay health insurance premiums for your employees, these amounts are deductible as employee benefit program expenses.
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Premium tax credits and advance payments
The Premium Tax Credit is a refundable tax credit designed to help eligible individuals and families with low or moderate incomes afford health insurance purchased through the Health Insurance Marketplace, also known as the Exchange. The size of your Premium Tax Credit is based on a sliding scale. Those with lower incomes receive a larger credit to help cover the cost of their insurance. When you enrol in Marketplace insurance, you can choose to have the Marketplace compute an estimated credit that is paid to your insurance company to lower what you pay for your monthly premiums (advance payments of the Premium Tax Credit, or APTC).
If you choose to have advance credit payments made on your behalf, you will be required to file Form 8962 with your income tax return to reconcile the amount of advance payments with the Premium Tax Credit that you may claim based on your actual household income and family size. If you do not opt for advance credit payments or the Marketplace determines that you were not eligible for advance payments at the time of enrolment, you should determine if you are eligible to claim the credit because your circumstances changed during the year.
If you received a subsidy or premium tax credit to purchase a health insurance plan in the Health Insurance Marketplace, any advanced-payment subsidy that lowered the cost of your health insurance premiums cannot be claimed as a deduction. However, the money you paid out of your own pocket for your premiums might be tax-deductible. If you pay for health insurance with pre-tax money, you cannot take a deduction for health insurance. If you have insurance through your employer, the premiums you pay are usually taken out of your paycheck before you are taxed. Since these premiums are paid with pre-tax dollars, they are already income-tax-free, meaning you cannot claim them as a tax deduction.
If you are self-employed, you may be eligible to deduct premiums that you pay for medical, dental, and qualifying long-term care insurance coverage for yourself, your spouse, and your dependents. This health insurance write-off is entered on Part II of Schedule 1 as an adjustment to income and transferred to page 1 of Form 1040. This deduction treatment is beneficial because it lowers your adjusted gross income (AGI). Having a lower AGI can reduce the odds that you’ll be affected by unfavourable phase-out rules that can cut back or eliminate various tax breaks.
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Tax deductions for employer-sponsored plans
The term "employer-sponsored coverage" refers to health insurance obtained through an employer, which is the most common way Americans get insurance. This coverage includes insurance for current employees and their families, as well as retired employees. Federal law also gives former employees the right to stay on their employer's health insurance, at their own expense, for a period after leaving their job.
The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan. However, this does not mean that the coverage is taxable. The value of the employer's contribution to health coverage is excludable from an employee's income and is not taxable. This reporting is for informational purposes only and provides employees with information on the cost of their health care coverage.
The portion of premiums that employees pay for employer-sponsored insurance (ESI) is typically excluded from taxable income. This exclusion of premiums lowers most workers' tax bills and reduces their after-tax cost of coverage. This tax subsidy is a significant factor in why most American families have health insurance coverage through their employers.
The exclusion of premiums for ESI reduces taxable income and is more valuable to taxpayers in higher tax brackets. For example, if a worker in the 12% income tax bracket also faces a payroll tax of 15.3% (7.65% paid by the employer and 7.65% paid by the employee), their taxes will be $254 less if their employer-paid insurance premium is $1,000.
The Health Insurance Marketplace, also known as the Exchange, offers a Premium Tax Credit to help eligible individuals and families with low or moderate incomes afford health insurance. This credit is based on a sliding scale, with lower-income individuals receiving a larger credit to cover the cost of their insurance. When enrolling in Marketplace insurance, individuals can choose to have the Marketplace compute an estimated credit paid directly to their insurance company to lower their monthly premiums.
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Eligibility for a special enrollment period
A Special Enrollment Period is a period of time outside of the yearly Open Enrollment Period when you can sign up for health insurance. You qualify for a Special Enrollment Period if you've had certain life events, including losing health coverage, moving, getting married, having a baby, or adopting a child, or if your household income is below a certain amount.
You may qualify for a Special Enrollment Period if you or anyone in your household lost qualifying health coverage in the past 60 days or expects to lose coverage in the next 60 days. Losing health coverage through your employer or the employer of a family member, including if you lose health coverage through a parent or guardian because you're no longer a dependent, may qualify you for a Special Enrollment Period. However, choosing to drop your coverage as a dependent does not qualify you for a Special Enrollment Period. You must also have a decrease in household income or a change in your previous coverage that made you eligible for savings on a Marketplace plan.
Moving to the U.S. from a foreign country or U.S. territory may qualify you for a Special Enrollment Period. However, moving only for medical treatment or vacation does not qualify. A permanent move to New York State or a move within the state that makes new health plans available to you is also considered a Qualifying Life Event for a Special Enrollment Period.
If you enrolled in insurance coverage through the Marketplace, you should report any changes in your circumstances, such as changes to your household income or family size, as they happen. Changes in circumstances may not only affect your advance payments of the premium tax credit but may also make you eligible for a special enrollment period.
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Form 1095-A and tax returns
Form 1095-A, also known as the Health Insurance Marketplace Statement, is used to report the total monthly health insurance premiums paid to the insurance company selected through the Marketplace. It also lists the amount of premium assistance received in the form of advance payments of the premium tax credit (PTC) that were paid directly to the insurance company. Form 1095-A is provided by the Marketplace and is essential for tax returns.
If you purchased health insurance through the federally facilitated Marketplace and set up a HealthCare.gov account, you can access Form 1095-A online or receive it by mail. This form is crucial for completing your tax return accurately. It contains information about the Marketplace plans used by any member of your household, including the "second lowest cost Silver plan" (SLCSP), which impacts the premium tax credit if used to lower premiums.
The premium tax credit is a refundable tax credit designed to assist eligible individuals and families with low to moderate incomes in affording health insurance purchased through the Health Insurance Marketplace. When enrolling in Marketplace insurance, individuals can choose to have the Marketplace compute an estimated credit paid directly to their insurance company to reduce their monthly premiums. This is known as advance payments of the premium tax credit or APTC.
To reconcile the advance payments with the actual credit claimed, individuals must file Form 8962, Premium Tax Credit, with their income tax return. This reconciliation process involves comparing the advance amount used with the amount qualified for based on the final income. If too much credit was used, it will be repaid through taxes, and if too little was used, the difference can be claimed.
It is important to review Form 1095-A for accuracy and contact the Marketplace Call Center if any errors are identified. Keeping Form 1095-A with other important tax information, such as W-2 forms, ensures that individuals have the necessary documentation to complete their tax returns and reconcile any advance payments of the premium tax credit.
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Frequently asked questions
If you are self-employed, you may be eligible to deduct premiums that you pay for medical, dental, and qualifying long-term care insurance coverage for yourself, your spouse, and your dependents. You can only claim the health insurance premiums for months when neither you nor your spouse were eligible for an employer-subsidized health plan.
If you choose to have advance credit payments made on your behalf, you will be required to file Form 8962 with your income tax return to reconcile the amount of advance payments with the Premium Tax Credit that you may claim based on your actual household income and family size.
The Premium Tax Credit is a refundable tax credit designed to help eligible individuals and families with low or moderate incomes afford health insurance purchased through the Health Insurance Marketplace. The size of your Premium Tax Credit is based on a sliding scale, so those with lower incomes get larger credits to help cover the cost of their insurance.
If you enrolled in a health plan through the Health Insurance Marketplace, you will get Form 1095-A, Health Insurance Marketplace Statement, from the Marketplace, not the IRS. If you purchased coverage through the federally facilitated Marketplace and set up a HealthCare.gov account, you can get a copy of Form 1095-A online from your account.
Any advanced-payment subsidy that lowered the cost of your health insurance premiums cannot be claimed as a tax deduction. However, the money you paid out of your own pocket for your premiums might be tax-deductible.
