Are premium payments tax deductible?

Whether or not premium payments are tax deductible is a common question for many taxpayers. The answer depends on several factors, including what type of insurance policy the premiums are for, whether you itemize deductions on your tax return, and your specific circumstances.

Quick Overview

In general, premiums paid for personal insurance policies are not tax deductible. This includes premiums for health, dental, vision, disability, and long-term care insurance. However, there are some exceptions. Here is a quick overview:

• Premiums paid for employer-sponsored health insurance coverage can be paid with pre-tax dollars.
• Self-employed individuals can deduct premiums paid for health insurance for themselves, their spouse, and dependents.
• Premiums paid for business-related insurance (e.g. liability, errors & omissions) are deductible business expenses.
• Some medical expenses, including premiums, are deductible if you itemize deductions and they exceed 10% of your adjusted gross income.

Employer-Sponsored Health Insurance

If you receive health insurance through your employer, then the premiums are typically paid with pre-tax dollars. This means the premium payments are not considered taxable income. Paying premiums pre-tax saves you money overall because your taxable income is lower. This benefit applies whether you pay a portion of the premiums yourself or your employer covers the full cost.

Key Points

• Premiums for employer-sponsored coverage can be paid pre-tax.
• Your W-2 will not include the value of employer-paid premiums.
• Paying premiums pre-tax lowers your taxable income.

Self-Employed Health Insurance Deduction

If you are self-employed, you can deduct the cost of health insurance premiums for yourself, your spouse, and your dependents. This deduction is taken “above-the-line”, meaning it can be claimed even if you don’t itemize deductions.

Requirements

To qualify for the self-employed health insurance deduction, you must meet these requirements:

• You have self-employment income.
• You are not eligible to participate in a subsidized employer-sponsored plan.
• The policy covers yourself, your spouse, and/or your dependents.
• The policy provides major medical coverage.

You can deduct 100% of eligible premiums paid for health insurance. This deduction cannot exceed your net self-employment income.

Key Points

• Available to self-employed individuals.
• Covers premiums for major medical insurance.
• Claimed above-the-line.
• Cannot exceed net self-employment income.

Business Insurance

Premiums paid for business insurance are deductible business expenses. This includes general liability insurance, errors and omissions insurance, and other policies that cover risks related to your business activities.

Types of Deductible Business Insurance

• General liability
• Errors & omissions
• Cyber liability
• Health insurance for employees
• Business life insurance
• Business auto insurance
• Umbrella liability

To deduct premiums for business insurance, the policies must be ordinary and necessary for your trade or business. Payments for personal insurance policies are not deductible as a business expense, even if you are self-employed.

Key Points

• Must be an ordinary & necessary business expense.
• Only covers policies related to the business.
• Personal insurance not deductible.
• Claimed as a business expense on Schedule C for sole proprietors.

Itemized Medical Expenses

Taxpayers who itemize deductions on Schedule A can claim medical expenses that exceed 10% of their adjusted gross income (AGI) for the year. This includes health insurance premiums paid with after-tax dollars.

For example, if your AGI is $50,000 and you paid $5,000 in medical expenses, including $2,000 in premiums, you can deduct $3,000 ($5,000 – $5,000 x 10%).

The types of premiums that qualify include:

• Health insurance premiums
• Long-term care insurance premiums
• Medicare premiums
• Dental & vision insurance premiums
• Prescription drug plan premiums

Key Points

• Must itemize to claim.
• Only medical expenses over 10% AGI can be deducted.
• Includes many types of health insurance and medical premiums.

When Premiums Are Not Deductible

As mentioned, premiums paid for personal health and medical insurance policies are generally not tax deductible. Here are some examples of non-deductible premiums:

• Individual health insurance premiums
• Medicare supplement plans
• Dental insurance premiums
• Vision insurance premiums
• Disability insurance premiums
• Long-term care insurance premiums (unless itemizing)

For individuals covered by an employer plan, any premiums paid with after-tax dollars would not be deductible. Premiums for spouses and dependents are also non-deductible, unless you are self-employed.

Key Points

• Premiums for personal health and medical policies are generally non-deductible.
• Exceptions apply for self-employed and itemizers.
• After-tax premiums for employer-sponsored plans are not deductible.

Pre-Tax Treatment

Although you can’t claim a deduction for premiums paid with after-tax dollars for personal health insurance, some options allow you to pay premiums pre-tax.

This includes:

• Paying for employer-sponsored coverage pre-tax.
• Contributing to a Health Savings Account (HAS) pre-tax.
• Using an Individual Coverage Health Reimbursement Arrangement (ICHRA).

These options allow you to lower your taxable income due to health insurance premiums, even if you can’t deduct them.

Key Points

• Some options allow pre-tax treatment.
• Lowers taxable income like a deduction.
• Includes employer plans, HSAs, and ICHRAs.

Example Scenarios

Here are some examples to illustrate if premiums are deductible or not in different situations:

Individual Policy

Linda pays $200 per month ($2,400 annually) for an individual health insurance policy she purchased from the marketplace. Linda cannot deduct these premiums because it is an individual policy, not an employer plan. She does not itemize deductions.

Employer-Sponsored Plan

Jeremy’s employer covers $500 of his monthly health insurance premium. Jeremy pays the other $100 per month pre-tax. Because Jeremy’s share is paid pre-tax, he cannot deduct the $1,200 annual premium he paid.

Self-Employed

As a self-employed consultant, Maggie pays $300 per month for a health insurance policy that covers her and her spouse. On her Schedule C, Maggie can claim an above-the-line deduction of $3,600 for the annual premiums paid.

Medical Itemizer

Rory paid $3,000 in premiums for health insurance last year. He also incurred $6,000 in other unreimbursed medical expenses. His AGI is $60,000. Since his total medical expenses are $9,000 and 10% of his AGI is $6,000, Rory can claim a $3,000 medical expense deduction for the amount exceeding 10% AGI.

Common Questions

Here are answers to some frequently asked questions on deducting insurance premiums.

Can I deduct long-term care insurance premiums?

You cannot deduct premiums for long-term care insurance UNLESS you itemize deductions and total medical expenses exceed 10% of adjusted gross income. Or if the premiums were paid by a business.

Are Medicare premiums deductible?

Medicare premiums can be deducted as a medical expense if you itemize deductions. This includes Part B, Part C, and Part D premiums. Reductions in your Social Security benefit for Medicare are also deductible.

Can I deduct dental and vision insurance premiums?

Dental and vision insurance premiums are not deductible UNLESS your total medical expenses exceed 10% of AGI and you itemize deductions. Then they can count towards the amount you can deduct.

My employer pays my premiums. Are they taxable?

No, employer-paid premiums are not taxable income to you. Your W-2 will not include the value of premiums paid by your employer.

Are premiums for supplemental plans deductible?

No, premiums paid for supplemental plans like dental, vision, and Medicare supplement plans are generally not deductible. The exceptions are if you itemize and deduct total medical expenses over 10% AGI.

Conclusion

In summary, premiums paid for personal insurance policies are typically not tax deductible. But there are important exceptions to understand, including employer-sponsored plans, self-employed plans, and itemized medical expenses.

Consult a tax professional for advice on your specific situation. Being aware of the deductibility rules can help you take advantage of available tax deductions.