Jane Dotson
There are several types of medical insurance plans that are not tax-deductible. For example, if you are a retired public safety officer, you cannot include health or long-term care insurance premiums that you elected to pay with tax-free distributions from a retirement plan. Similarly, if you are a federal employee participating in the premium conversion plan of the Federal Employee Health Benefits (FEHB) program, you cannot deduct the premiums paid with pre-tax dollars. If you are self-employed, you cannot claim a deduction for any months you were eligible for an employer-sponsored health insurance plan. Additionally, life insurance costs are not deductible.
| Characteristics | Values |
|---|---|
| Insurance premiums treated as paid by your employer | Not deductible unless included in box 1 of your Form W-2, Wage and Tax Statement |
| Health insurance costs of self-employed individuals | Deductible if you had a net profit for the year and the insurance covers medical care |
| Health insurance costs of employees | Not deductible |
| Health insurance costs of retired public safety officers | Not deductible |
| Insurance premiums paid with pre-tax dollars | Not deductible |
| Insurance premiums paid with tax-free retirement plan distributions | Not deductible |
| Insurance premiums for a nondependent | Not deductible unless the nondependent is your child under 27, your child whom you don't claim as a dependent because of divorce or separation, a person you could have claimed as a dependent except that they received $5,050 or more of gross income or filed a joint return, or a person you could have claimed as a dependent except that you or your spouse can be claimed as a dependent on someone else's 2024 return |
| Life insurance costs | Not deductible |
| Health stipends | Not deductible |
| Medicare premiums | Deductible if you itemize your deductions and have qualifying medical expenses that exceed 7.5% of your adjusted gross income |
| COBRA insurance premiums | Deductible if you're self-employed and neither you nor your spouse qualifies for a job-based health plan, or if you're itemizing and your unreimbursed out-of-pocket medical expenses make up more than 7.5% of your AGI |
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What You'll Learn
Premiums paid with pre-tax dollars
If you pay your insurance premiums with pre-tax dollars, you cannot deduct them. This is because you already received a tax break when your employer deducted your premium from your paycheck. The pre-tax option allows you to receive the full tax benefit because all your premiums are tax-free.
Pre-tax medical premiums are health insurance premiums deducted from your paycheck before your employer withholds income taxes or payroll taxes. They are typically available for employer-sponsored health insurance plans. They can save individuals up to 40% on income and payroll taxes.
If you are a federal employee participating in the premium conversion plan of the Federal Employee Health Benefits (FEHB) program, your share of the FEHB premium is paid by making a pre-tax reduction in your salary. As your insurance premiums are paid with money that is never included in your gross income, you cannot deduct the premiums paid with that money.
If you have COBRA insurance, which is continuing coverage through a previous employer, you may be able to deduct your payments if you’re self-employed and neither you nor your spouse qualifies for a job-based health plan. Otherwise, you can only deduct COBRA payments if your overall unreimbursed out-of-pocket medical expenses make up more than 7.5% of your AGI.
Employees who purchase disability insurance through their company’s group medical plan can choose to pay for its premium with pre-tax or after-tax dollars. Employees make their deduction choice upon signing up for the benefit.
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Employer-sponsored premiums
Generally, you can deduct medical and dental insurance premiums for yourself, your spouse, and your tax dependents. However, this does not apply to employer-sponsored premiums.
There are certain situations where employer-sponsored premiums may be tax-deductible. Firstly, if the employer-sponsored coverage is unaffordable or does not meet the minimum value standard, employees may be eligible for a premium tax credit. Coverage is considered unaffordable if the employee's contribution exceeds 8.39% of their household income in 2024. Additionally, employer-sponsored coverage meets the minimum value test if it covers at least 60% of the expected total cost of benefits. If employees meet these criteria, they can choose to enroll in coverage in the ACA marketplace and may qualify for a premium tax credit.
Furthermore, if you are self-employed and have previously received employer-sponsored coverage, you may be able to deduct your COBRA insurance payments. COBRA insurance allows you to continue your previous employer's coverage, and you can deduct these payments if you are self-employed and do not qualify for a job-based health plan. However, this deduction is only applicable if your unreimbursed out-of-pocket medical expenses make up more than 7.5% of your AGI.
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Premiums for non-dependents
Generally, you cannot deduct any additional premium you pay as a result of including on your policy someone who isn't your spouse or dependent, even if that person is your child under the age of 27. However, you can deduct the additional premium if that person is:
- Your child whom you do not claim as a dependent because of the rules for children of divorced or separated parents.
- Any person you could have claimed as a dependent on your return, except that person received $5,050 or more of gross income or filed a joint return.
- Any person you could have claimed as a dependent except that you, or your spouse if filing jointly, can be claimed as a dependent on someone else's 2024 return.
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, which means you benefit whether or not you itemize your deductions.
If you are a federal employee participating in the premium conversion plan of the Federal Employee Health Benefits (FEHB) program, you cannot deduct the premiums paid with that money. This is because your share of the FEHB premium is paid by making a pre-tax reduction in your salary.
If you receive insurance through your employer, you can only deduct your premiums if they are paid with post-tax earnings. This is a somewhat rare exception, as many employers deduct employees' shares of insurance premiums before taxes are taken out of paychecks.
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Life insurance costs
Life insurance premiums are generally not tax-deductible. The IRS considers these expenses personal or non-deductible expenses. However, there are some exceptions. For instance, if you are self-employed, you may be able to count disability insurance premiums as a deduction. Additionally, if you own a business and pay for your employees' life insurance premiums, you can typically deduct the cost as a business expense.
On the other hand, medical and dental insurance premiums are typically deductible for you, your spouse, and your tax dependents if you are self-employed and have a net profit for the year. This deduction is known as an above-the-line deduction and is available even if you do not itemize. It lowers your adjusted gross income. However, it is important to note that if you are enrolled in an employer-sponsored health insurance plan, you cannot deduct the premiums if they are paid with pre-tax dollars. This is because the amount employees pay toward premiums is usually excluded from taxable income.
In addition to insurance premiums, there are other deductible medical expenses, including:
- Doctor, dentist, surgeon, chiropractor, psychiatrist, psychologist, and non-traditional medical practitioner fees.
- Inpatient hospital care or residential nursing home care costs, including meals and lodging, if the principal reason for residence is medical care.
- Acupuncture treatments.
- Inpatient treatment for alcohol or drug addiction.
- Participation in a smoking-cessation program and prescription drugs to alleviate nicotine withdrawal.
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Health stipends
A health stipend is a fixed, taxable allowance that employers can provide to employees to help pay for health insurance and other out-of-pocket medical expenses. It is separate from an employee's salary and can be offered as a monthly allowance through an expense card, a lifestyle spending account (LSA), or as reimbursements for health expenses. This allows employees to choose from multiple health coverage options and select the policy that best suits their needs.
There are several advantages to offering health stipends. Firstly, it provides flexibility and personalization for employees, who can choose which eligible expenses to reimburse. Secondly, it is a simple and easy way for employers to manage health benefits, especially for small and medium-sized businesses (SMBs) that cannot afford traditional group health plans. Thirdly, it allows employers to provide health benefits to international workers and 1099 contractors without affecting their employment status.
However, there are also some disadvantages to consider. Health stipends are subject to additional taxes compared to Health Reimbursement Arrangements (HRAs). Employers must pay payroll tax on reimbursements, and employees must pay income tax on the amounts received, typically between 20% to 40%. Additionally, employers cannot require employees to submit proof of insurance, so there is no guarantee that the stipend will be used for its intended purpose.
It is important to note that while health stipends can be a good option for certain organizations, they may not comply with federal law depending on the company's size. Therefore, employers should carefully consider the tax implications and consult relevant tax laws before implementing a health stipend program.
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Frequently asked questions
Yes, there are some medical insurance plans that are not tax-deductible. For example, if you are a retired public safety officer, you cannot include health or long-term care insurance premiums that you elected to pay with tax-free distributions from a retirement plan. Additionally, life insurance costs are not deductible.
Yes, any medical and dental expenses paid by an employer-sponsored plan are not deductible unless the premiums are included in box 1 of your Form W-2, Wage and Tax Statement.
Yes, if you are self-employed, you cannot claim a deduction for any months you were eligible for an employer-sponsored health insurance plan.
