Health insurance is expensive, especially if you lose your job or don't have employer coverage. A variety of tax breaks can help you pay your health insurance premiums, but you need to know the rules and some key strategies to make the most of these benefits.
What Are Health Insurance Premiums?
Whether you have health insurance through your employer or on your own, or even if you're covered by Medicare, you usually have to pay monthly premiums for your coverage. But your premiums may be tax-deductible, or you may be able to take other tax breaks that can help reduce your costs and stretch your health care dollars. Here's how to figure out whether you are eligible for these tax benefits and what you need to do to get them.
Tax-Deductible Premiums for the Self-Employed
Your health insurance premiums can be tax-deductible if you have income from self-employment and you aren't eligible to participate in a health plan offered by an employer (or your spouse's employer). You don't have to itemize to be eligible -- you take the deduction on Schedule 1 of Form 1040. The deduction is limited to the net profit from self-employment income you reported on Schedule C, says Jina Etienne, a certified public accountant in Silver Spring, Maryland, and member of the American Institute of CPAs' Financial Literacy Commission.
Even if you had employer-sponsored health insurance for the first few months of the year, then lost your job and started doing some freelance work, you may be able to deduct some of the premiums you paid for the months when you weren't eligible for employer-sponsored coverage.
Itemized Deduction for Medical Expenses
Health insurance premiums can count as a tax-deductible medical expense (along with other out-of-pocket medical expenses) if you itemize your deductions. You can only deduct medical expenses after they exceed 7.5% of your adjusted gross income. For more information about tax-deductible medical expenses, see IRS Publication 502 Medical and Dental Expenses.
However, if you have health insurance through your employer and are paying your premiums with pretax money, you can't double dip and claim those premiums as a tax-deductible medical expense, says Morris Armstrong, an enrolled agent and registered investment advisor in Cheshire, Connecticut. But there are some cases where people pay premiums for employer-based coverage on an after-tax basis and may not realize that they could be deductible. "Some retirees (such as public safety officers) may lose out on a legitimate deduction by failing to mention that they pay for medical insurance through their pension and that is on a post-tax basis," he says.
HSA Withdrawals May Be Tax-Free if You Lose Your Job
You generally can't withdraw money tax-free from an HSA to pay health insurance premiums, but there are a few key exceptions that can help a lot of people right now. You can take tax-free HSA withdrawals to pay COBRA health insurance premiums (COBRA is a federal law lets you continue your employer's coverage for up to 18 months after you lose your job). You can also withdraw money tax-free from an HSA to pay health insurance premiums if you're receiving unemployment benefits, even if you choose to get your own coverage rather than sign up for COBRA.
"There is nothing special people need to do except keep good records," says Roy Ramthun, president of HSA Consulting Services. "If they are receiving unemployment, they would want to keep copies of statements and payments that document when they started and stopped receiving unemployment benefits. This would determine the period during which their health insurance premiums would be eligible for tax-free reimbursement from the HSA." If you're paying COBRA premiums, you can take tax-free HSA withdrawals even if you aren't receiving unemployment benefits, but keep records of your COBRA premiums in your HSA tax files.
You'll get the biggest tax benefit if you can keep the money growing in the HSA tax-free for the long term, but it can still be worthwhile to contribute to an HSA even if you need to use the money right away to pay for eligible health insurance premiums. You'll still be able to deduct your contribution when you file your income tax return, even if the money doesn't have time to grow in the account.
"There is no time limit between when someone makes a tax-deductible contribution to an HSA and they can withdraw the money tax-free," says Ramthun. "This can really help people who have cash-flow issues."
You can withdraw money from an HSA for eligible expenses at any time -- even years in the future -- but the expenses must have been incurred after the date your HSA account was established.
If you have an HSA-eligible health insurance policy with a deductible of at least $1,400 for individual coverage or $2,800 for family coverage in 2020, then you can contribute up to $3,550 for 2020 for individual coverage, or $7,100 for family coverage (plus $1,000 if you're 55 or older). Also, you still have until July 15, 2020, to make tax-deductible contributions to an HSA if you had an HSA-eligible health insurance policy in 2019. Keep in mind that you may have to prorate your contribution amount if you only have an HSA-eligible policy for part of the year. See IRS Publication 969, Health Savings Accounts for more information.
Tax-Free HSA Withdrawals for Medicare Premiums
HSA owners who are 65 and older can withdraw money tax-free from their accounts to pay Medicare Part B, Part D and Medicare Advantage premiums (but not Medigap premiums). You can tap the account tax-free to pay the premiums for yourself as well as for your spouse. If you have your Medicare premiums paid automatically from your Social Security benefits, you can withdraw the money tax-free from the account to reimburse yourself for the premiums (keep records in your tax files of the eligible expenses).
You can't make new HSA contributions after you enroll in Medicare, but you can use money that had already been growing in the account to pay for Medicare premiums.
Government Subsidies for Marketplace Coverage
If you buy health insurance through your state insurance marketplace or HealthCare.gov, you may qualify for a government subsidy to help pay the premiums. To qualify, your modified adjusted gross income must be from 100% to 400% of the federal poverty level, which is up to $49,960 if you're single, $67,640 for a couple, or $103,000 for a family of four. This subsidy is technically an advance premium tax credit -- you can either have it applied immediately to lower your premiums or you can receive it as a refund when you file your income tax return.
You need to estimate your annual income when you buy coverage on the marketplace, but then the actual amount of the subsidy is based on your modified adjusted income for the year. If your income ends up being higher than you expected when you bought the coverage, you may have to pay back some of the money when you file your income tax return next spring.
Tax Breaks for Long-Term Care Insurance Premiums
You may be able to get a tax deduction or use tax-free money to pay premiums for long-term care insurance.
Long-term care insurance premiums can also count toward the medical expense deduction if you itemize (also subject to the 7.5% adjusted gross income threshold for medical expenses). Or you can withdraw money tax-free from a health savings account for long-term care premiums. The amount of long-term care premiums that counts for the break depends on your age -- the older you are, the larger the break.
You can withdraw or deduct up to $430 tax-free to pay long-term care premiums in 2020 if you're age 40 or younger, $810 if you're 41 to 50, $1,630 if you're 51 to 60, $4,350 if you're 61 to 70, or $5,430 if you're older than 70. If your spouse is also paying long-term care insurance premiums, you can also withdraw up to the amount based on his or her age for premiums, too.
Kimberly Lankford has been a financial journalist for more than 20 years. As the "Ask Kim" columnist at Kiplinger's Personal Finance Magazine and Kiplinger.com, she received hundreds of reader questions every month about insurance, taxes, retirement planning and other personal finance issues. Her financial articles have also appeared in the Washington Post, Boston Globe, Chicago Tribune, Bloomberg Wealth Manager, Military Officer magazine and many local newspapers.
She received the personal finance Best in Business Award from the Society of American Business Editors and Writers, and she has written three books: "Rescue Your Financial Life," "The Insurance Maze" and "Ask Kim for Money Smart Solutions." She also wrote the "Financial Field Manual: Kiplinger's Personal Finance Guide for Military Families," which has been reprinted in three editions and is distributed to servicemembers at military bases throughout the world. Kim has been featured as a financial expert on NBC's Today Show, CBS This Morning, CNN, CNBC, Fox News, National Public Radio, PBS and many local radio and TV stations. Her website is www.kimberlylankford.com.