Health insurance is expensive, but several tax breaks can help you pay your premiums and deduct your health care expenses. The new tax laws in 2021 expanded these benefits even further, which can be particularly helpful to people who have lost their jobs or bought their own health insurance coverage. You may be able to receive additional breaks when filing your 2021 income-tax return.
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 are not eligible to participate in a health plan offered by an employer (or your spouse’s employer). Your Medicare premiums may also be tax-deductible if you’re self-employed, says Morris Armstrong, an enrolled agent in Cheshire, Connecticut. “That is something people do not always realize,” he says.
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 Springs, Maryland.
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 month 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. This threshold had been scheduled to increase to 10%, but a tax law passed at the end of 2020 permanently extended the 7.5% threshold.
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 Armstrong. 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.
In some states you may be able to deduct eligible health insurance expenses on your state income tax return, even if you don’t itemize your federal return, says Armstrong.
HSA Withdrawals May Be Tax-Free if You Lose Your Job
You generally can’t withdraw tax-free money from a health savings account to pay health insurance premiums, but there are a few key exceptions. You can take tax-free HSA withdrawals to pay COBRA health insurance premiums; COBRA is a federal law that lets you continue your employer’s coverage for up to 18 months after you lose your job. You can also withdraw tax-free money 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 signing 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 contributions 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 when 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 2022, then you can contribute up to $3,650 if you have individual coverage or $7,300 for family coverage (plus $1,000 if you ‘re 55 or older). Also, you still have until April 18, 2022, to make tax-deductible contributions to an HSA if you had an HSA-eligible health insurance policy in 2021 (the contribution limits were slightly lower for 2021). 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 tax-free money from their accounts to pay Medicare Part B, Part D and Medicare Advantage premiums (but not Medigap premiums). You can tap the tax-free account 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 tax-free money 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 has already been growing in the account to pay for Medicare premiums.
Government Subsidies Help Pay Marketplace Health Insurance Premiums
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. The size of the subsidy is based on your income. 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.
The American Rescue Plan Act, which was signed in March 2021, increased the size of the subsidies and eliminated the income cap for receiving the assistance (in the past, you could only qualify for the subsidy if your income was below 400% of the federal poverty level). These changes to the marketplace premium subsidies are in effect for 2021 and 2022. This law also provides extra subsidies for people who receive unemployment benefits in 2021.
When you file your income-tax return for 2021, you’ll reconcile the amount you received as an advance premium tax credit with what you are qualified for based on your year-end income. You can get back more money if you qualify for a larger subsidy than you received during the year. See this factsheet at Healthcare.gov for instructions on reconciling your 2021 payments.
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 tax-free money 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 $450 tax-free to pay long-term care premiums in 2021 and 2022 if you’re age 40 or younger, $850 if you’re 41 to 50, $1,690 if you’re 51 to 60, $4,510 ($4,520 in 2021) if you’re 61 to 70, or $5,640 if you’re older than 70. If your spouse is paying long-term care insurance premiums, you can also withdraw up to the amount based on his or her age for premiums, too.
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