How to deduct health and medical expenses
Taxpayers have a lot of options when it comes to deducting insurance and medical expenses. There is a way for the same person to deduct medical expenses and insurance payments, plus get a subsidy for their insurance payments, all in the same year! However, it’s important to understand the difference between these three kinds of tax opportunities. Let's walk through them.
1) The Self-Employed Health Insurance Deduction
- Who: Self-employed taxpayers
- What: Health, dental, and long-term care premiums
- Where: Form 1040, Line 29
Since entrepreneurs don’t have access to employer-sponsored health insurance (and the lower group rates that come with them), they often have to purchase their own health insurance individually. That means paying higher premiums and handling your own enrollment process.
However, thanks to the self-employed health insurance deduction, self-employed individuals can reduce their AGI (and in turn, their taxable income) by deducting the cost of their monthly payments.
The self-employed health insurance deduction has been around for awhile -- 1987 to be exact. It’s written to ensure that self-employed individuals get a break on their healthcare costs. It’s available if you:
- Are self-employed (ex. Drive for Uber full time)
- Have a net profit from your business
- Are not able to receive health insurance coverage from a spouse or employer
Taxpayers who meet all of these requirements can deduct what they pay for health insurance, up until the limit of their business income. This is your net income (income after business expenses), which you can find on Line 31 of your Schedule C.
What that means is that if you get your health insurance through the Marketplace, and receive a subsidy on your monthly payments, you can only deduct the cost of your bill every month, not the original price of your plan.
It also means that if your net business profit for the year is lower than the total yearly cost of your health insurance premiums, then you can only deduct the amount equal to your business profit.
For example: Let’s say you make $3,000 from driving for Uber on the weekends this year, and had $500 in business expenses (note, that’s an AGI of $2,500). If you pay $3,600 per year for a health insurance plan for you and your family, then you can only deduct $2,500 of that $3,600.
2) The Premium Tax Credit
- Who: Those who buy through the Marketplace, below a certain income
- What: Health insurance
- Where: Form 8962
One of the provisions of the Affordable Care Act was the introduction of the premium tax credit. These are credits, or subsidies, that make your health insurance plan more affordable. The subsidies are meant to reduce the cost of your health insurance plan according to your income--specifically, how far above the federal poverty level your income is. When you call Stride Health to enroll in health insurance, and we tell you that you can get a subsidy of $100 per month off of your monthly costs, that’s your premium tax credit at work!
To receive a subsidy, your income must be between 100% (or 138%, if your state did not expand Medicaid) and 400% of the federal poverty level ($11,880-$47,520 for an individual for 2016).
You also need to meet a few other requirements. You’re eligible for the premium tax credit if:
- You or a family member bought health insurance from the Marketplace
- You cannot be claimed as a dependent by another person
- You don’t file your taxes as “Married filing separately” (although this requirement is dropped in cases of domestic abuse or abandonment)
- You are not eligible to purchase health insurance through a spouse or employer
- You are not eligible for Medicaid, Medicare, CHIP (Children’s Health Insurance Program), or TRICARE (for military personnel)
When you exercise the Premium Tax Credit, you have two options:
- Claiming your credit monthly: this means that the government issues your credit straight to your health insurer on the “back end” in order to give you a lower monthly cost. Pretty cool, right?
- Claiming your credit as a lump sum at tax time: this means when you file your tax return, you will see some additional funds paid out to you in the exact amount of the tax credit you qualified for.
Just be sure to file Form 8962 when you take the Premium Tax Credit -- you can attach it to your tax return or make sure it is included in your tax return when you file electronically--to show your monthly subsidy!
3) Deducting Medical Expenses
- Who: Anyone!
- What: Approved medical expenses
- Where: Schedule A, Lines 1-4
This one’s a bit tricky, but can potentially save you a lot of money in taxes if done correctly.
Background on deducting expenses:
Generally speaking, when you file your taxes, you have the option of taking the standard deduction, or itemizing your deductions. The standard deduction works similarly to the standard mileage rate that you may be familiar with--it’s a standard amount that taxpayers can deduct from their tax liability, calculated to include a lot of the typical expenses that people tend to incur. The standard deduction in 2016 for a single filer is $6,300.
However, you have the option to itemize your deductions on a separate form, Schedule A, instead of taking the standard deduction on Form 1040. Itemizing deductions could save you a lot of money come tax time since you can potentially claim a deduction higher than $6,300 (if you have enough deductible expenses to itemize). Here are some of the deductions that you can itemize:
- Mortgage interest
- Gifts to charity
- State and local income taxes
- Medical expenses above 10% of your Adjusted Gross Income
Here’s where your medical expenses come in:
If you incur medical expenses that add up to more than 10% of your Adjusted Gross Income (AGI), then you can deduct those expenses on Schedule A! So if your AGI is $50,000, and your medical expenses total to $6,000, you can deduct $1,000 of that on Schedule A. Here’s why:
AGI = $50,000
10% of AGI = $5,000
Medical expenses = $6,000
Expenses above 10% of AGI = $6,000 - $5,000 = $1,000
The ground rules
Careful -- you can’t deduct all of your medical expenses! There are a few requirements on which expenses you can deduct.
The expenses cannot have been reimbursed to you, and they have to have been paid in the year of your tax filing. So if you pay for an ambulance ride on January 1st of 2016, you can’t deduct it on your 2015 tax return.
There are also regulations on which specific expenses you can deduct. Here are some of the approved deductible medical expenses:
- Payments and fees to doctors
- Payments for inpatient hospital care or nursing home care
- Inpatient treatment at alcohol or drug addiction facilities
- Payments for prescriptions
- Transportation to and from essential medical care (such as gas, bus tickets, ambulance costs, or the standard mileage rate for medical driving!)
- Health insurance premiums
So if you’re considering itemizing your deductions, just be sure to do the math! If you’re a single filer and your deductible expenses add up to less than $6,300, you definitely want to take the standard deduction instead.
One more thing: Itemizing your deductions can be tricky! If you want to go this route, we definitely recommend speaking with a tax preparer, or at least using a tax filing software. And definitely keep all of your receipts from your deductible expenses!
Bringing it all together
When it comes to getting a break on your medical expenses, there are a lot of tax opportunities available to you! Always be sure to evaluate all of your options, so that you can be sure you’re getting the most out of your tax return.
Tade Anzalone heads up Stride’s tax and finance support and is a registered tax return preparer and 2017 Annual Filing Season Program Participant. In addition to her years of experience helping people navigate complicated finance and tax obligations, she has degrees in Government, Psychology, and Spanish from Georgetown University.
Disclaimer: The information contained in this Guide is not offered as legal or tax advice. The U.S. federal income tax discussion included in this Guide is for general information purposes only and is not a complete analysis or discussion of all potential tax consequences that may be relevant to a particular individual. In light of the foregoing, each individual should consult with and seek advice from such individual’s own tax advisor with respect to the tax consequences discussed herein. Any information contained in this Guide is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the U.S. Internal Revenue Code of 1986, as amended.