Health insurance premiums, especially in the wake of the Affordable Care Act, have risen dramatically and are one of the greatest expenses that most individuals pay. Although the cost of health insurance is allowed as part of an individual’s medical deductions when itemizing deductions, only the amount of total medical expenses that exceeds 7.5% of the taxpayer’s adjusted gross income (AGI) is deductible. The 7.5% limitation is increased to 10% for years after 2020.
The purpose of this article is twofold: first, to remind you what insurance can be included as a medical deduction; and second, to inform you of an alternate means of deducting health insurance for certain self-employed individuals—a means that avoids the AGI limitation and allows for deduction without itemizing.
Medical expenses are deductible as an itemized deduction but only to the extent they exceed a percentage of a taxpayer’s adjusted gross income (AGI). For a long time, the percentage was 7.5%, which was then raised for under-age-65 taxpayers to 10% for 2013 through 2016 and then lowered back to 7.5% for all taxpayers for years 2017 and 2018. It was scheduled to go back up to 10% starting with tax year 2019. However, with the passage of the Appropriations Act of 2020, Congress reduced that percentage back to 7.5% for tax years 2019 and 2020, allowing more taxpayers to qualify for the medical deduction.
However, keep in mind that the total of the itemized deductions must exceed the standard deduction before the itemized deductions will provide a tax break. So even if your medical deductions exceed the 7.5% floor, this doesn’t necessarily mean you will have a tax benefit from them.