How Health Insurance Can Lower Your Tax Bill

Health Insurance Premium Deductions

For many taxpayers, health insurance premiums can be deducted to reduce taxable income. The extent of these deductions depends on your employment status and whether you purchase insurance through an employer, the marketplace, or independently.

Self-Employed Health Insurance Deduction

If you’re self-employed and pay for your own health insurance, you may be eligible to deduct 100% of your premiums for yourself, your spouse, and dependents. This deduction applies even if you don’t itemize deductions, as it’s considered an “above-the-line” adjustment to income.

Key Requirements:

You must have a net profit from self-employment.
You can’t be eligible for an employer-sponsored health plan through a spouse.
The deduction cannot exceed your earned income from self-employment.

Itemized Medical Expense Deductions

If your medical expenses exceed 7.5% of your Adjusted Gross Income (AGI), you may be able to deduct them if you itemize deductions on your tax return. These expenses include:

Health insurance premiums (if not deducted elsewhere)
Out-of-pocket costs like copays, prescriptions, and medical treatments
Dental and vision care expenses

To maximize this deduction, consider grouping medical expenses into a single tax year to surpass the 7.5% AGI threshold.

The Premium Tax Credit (PTC)

If you purchase health insurance through the Health Insurance Marketplace, you may be eligible for the Premium Tax Credit (PTC). This tax credit helps lower the cost of monthly premiums and can be applied in advance or claimed when filing taxes.

Who Qualifies for the Premium Tax Credit?

Eligibility for the PTC depends on your household income and family size. To qualify:

Your income must be between 100% and 400% of the federal poverty level (FPL).
You must purchase a plan through Healthcare.gov or a state exchange.
You cannot be eligible for affordable employer-sponsored health insurance.

How It Works:

You can choose to receive the credit in advance, which lowers your monthly premium.
Alternatively, you can wait until tax season and claim the credit as a refund.
If your income changes during the year, report it to the Marketplace to avoid overpaying or underpaying tax credits.

Repayment Considerations

If you underestimate your income, you may need to repay some or all of the premium tax credit when filing taxes. Likewise, if you overestimate your income, you could receive additional credit at tax time.

Health Savings Accounts (HSAs) and Tax Advantages

A Health Savings Account (HSA) is a triple tax-advantaged savings account that allows individuals with high-deductible health plans (HDHPs) to save for medical expenses while reducing their tax burden.

Tax Benefits of an HSA

Contributions are tax-deductible (or pre-tax if made through payroll deductions).
Growth is tax-free, meaning any interest or investment earnings are not taxed.
Withdrawals for qualified medical expenses are tax-free, covering expenses like doctor visits, prescriptions, and dental care.

HSA Contribution Limits (2024)

Individuals: $4,150 per year
Families: $8,300 per year
Catch-up contributions: If you’re 55 or older, you can contribute an additional $1,000.

Long-Term Savings with an HSA

Unlike Flexible Spending Accounts (FSAs), HSAs roll over unused funds each year. You can even use HSA funds in retirement to pay for medical expenses without penalties, making it a smart long-term tax strategy.

Other Ways Health Insurance Impacts Taxes

Flexible Spending Accounts (FSAs)

If your employer offers an FSA, you can contribute pre-tax dollars (up to $3,200 in 2024) to cover eligible medical expenses. FSAs reduce taxable income, but they have a use-it-or-lose-it rule, meaning unused funds may expire at the end of the year.

Employer-Sponsored Health Plans

If you get insurance through an employer, your premium payments are typically pre-tax, reducing your overall taxable income. This benefit helps lower FICA taxes (Social Security & Medicare) as well.

Medicare Premiums and Taxes

For seniors, Medicare Part B and Part D premiums may be deductible if they meet the 7.5% AGI medical expense threshold. Additionally, high-income retirees may pay Income-Related Monthly Adjustment Amounts (IRMAA), which can impact tax planning.

Conclusion

Health insurance doesn’t just protect your health—it can also lower your tax bill in multiple ways. Whether through premium deductions, the Premium Tax Credit, or tax-advantaged accounts like HSAs, understanding your options can lead to significant savings.

Need help choosing the right plan? At Marketplace Nebraska, we specialize in finding affordable health insurance solutions that fit your needs and budget. Contact Mark today to explore your options and maximize your tax benefits!

This blog is for informational purposes only and does not constitute tax or financial advice. Tax laws change frequently, and individual circumstances vary. Before making any decisions regarding tax deductions or health insurance-related tax strategies, consult with a qualified tax professional or CPA to ensure compliance with current tax regulations.