Deducting Health Expenses: Self-Employed Health Insurance Deduction & More
Taxpayers have a lot of options when it comes to saving on health insurance and medical expenses. The primary ways of doing this are with the Self-Employed Health Insurance Deductions, the premium tax credit, and by deducting approved medical expenses. Wondering if, and how, these all coexist? The good news is that they do! The same person can deduct medical expenses and health insurance payments, while also receiving a subsidy for insurance payments, all in the same year! However, it’s important to understand the difference between these three kinds of tax opportunities.
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1. The Self-Employed Health Insurance Deduction
Who: Self-employed taxpayers
What: Health, dental, and long-term care premiums
Where: Form 1040, Line 29
As you probably already know, independent workers generally don’t have access to employer-sponsored health insurance (and the lower group rates that come with them); they oftentimes have to purchase health insurance individually. That means paying higher premiums and walking yourself through the painstaking enrollment process.
However, thanks to the self-employed health insurance deduction, you (and all the other independent workers out there) can reduce your Adjusted Gross Income (AGI) by deducting the cost of your monthly payments. Put simply, the answer to the question we get here at Stride pretty frequently (“Can I deduct my health insurance premiums?”) is yes, absolutely! If you are new to understanding taxes, this helps you out because it reduces the amount of income that you pay taxes on.
The self-employed health insurance deduction has been around for a while–since 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 business profit (profit = business income - business expenses)
Are not able to receive health insurance coverage from a spouse or employer
If you are a taxpayer who meets all of these requirements, you can deduct what you pay for health insurance, up until the limit of your business profit. Your business profit is your business 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 brings you AGI to $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: Reduced health insurance costs
Where: Form 8962
One of the provisions of the Affordable Care Act was the introduction of the premium tax credit. While this isn’t a deduction, 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. More specifically, your subsidy amount is determined by where your income falls in relation to the federal poverty level. As a general rule, the closer you are to the federal poverty level, the higher subsidy you will receive. When you call Stride Health to enroll in health insurance and we tell you that you can get a subsidy of $100 per month, effectively lowering your monthly costs by that amount, that’s the premium tax credit at work!
To receive a subsidy, your income must be between 100% (or 138% if your state expanded Medicaid) and 400% of the federal poverty level ($12,140-$48,560 for an individual for 2018).
You also need to meet a few other requirements to qualify for the premium tax credit. 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.
Regardless of which option you choose, be sure to file Form 8962 when you take the premium tax credit. You can either attach it to your tax return or include it in your tax return when you file electronically!
3. Deducting Medical Expenses
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 2018 standard deduction is $12,000 for a single filer.
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 $12,000 (if you have enough deductible expenses to itemize). Here are some of the deductions that you can itemize:
Gifts to charity
State and local income taxes
Medical expenses above 7.5% of your Adjusted Gross Income
Where Medical Expenses Come Into the Picture
If you incur medical expenses that add up to more than 7.5% of your Adjusted Gross Income (AGI) for the 2018 tax year, you can deduct those expenses on Schedule A! For example, if your AGI is $50,000, and your medical expenses total to $5,000, you can deduct $1,250 of that on Schedule A. Here’s why:
AGI = $50,000
7.5% of AGI = $3,750
Medical expenses = $5,000
Expenses above 7.5% of AGI = $5,000 - $3,750 = $1,250
Deductible Medical Expenses
Be 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 paid for an ambulance ride you took in 2018 on January 1st of 2019, you can’t deduct it on your 2018 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
The bottom line: 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 $12,000, you definitely want to take the standard deduction instead. If math just isn’t your thing, you can use a tax filing software, which will do the math for you! All you have to do is input your medical expenses and other deductions that would go on a Schedule A, and then the software will automatically choose the higher deduction for you, whether it is the standard deduction or itemizing your deductions.
Stride Tip: Decided to itemize your deductions? It can be tricky! We definitely recommend speaking with a tax preparer or at least using a tax filing software. And definitely be sure to 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.
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.