Welcome, readers! This is Abri News, where you’ll find helpful policy information to assist you in finding the best coverage for your needs. We cover a variety of topics here, including insurance plans, types of coverage, claim adjustments, conditions and clauses. Our most recent article is an overview of hurricane insurance. Hurricane Ida affected many who never expected to be hit by a hurricane, let alone major flooding and tornadoes. If you’re unsure whether you’re adequately covered in the event of a hurricane, now is a good time to check. Hurricane season doesn’t officially end until November 30th! Our last article, ‘Hurricane Season: Are You Covered?’ should be your next read!
Today, our focus is everyone’s favorite topic: saving money. Since health insurance is a must for most people and the government has a vested interest in ensuring everyone is covered—even partially—the existing tax code has certain provisions for deducting health-related costs from our annual returns. Health insurance makes up a large chunk of most American families’ monthly expenditures. In 2020, the average national cost of health insurance for an individual was $456 per month. For a family, the cost was an estimated $1,152 per month. This adds up to $5,472 and $13,824 per year, respectively. Keep in mind these figures are averages. Health insurance costs can be significantly greater depending on the chosen plan, age of individual being covered, location, income, and number of those covered by the plan. (These estimates are also based on eHealth’s study of Affordable Care Act plans.)
The cost of health insurance is only predicted to rise in coming years. The reasons for such inflation are numerous. To begin with, the cost of medical care is increasing. According to the Center for Medicare and Medicaid Services (CMS), national health spending will increase by an average rate of 5.5% every year and is predicted to reach six trillion by 2027. In addition to increasing medical costs, the price of pharmaceuticals is also rising. Between 2015 and 2019, the median price of generic drugs increased 37.6%. According to research done in the United States, six-in-ten adults have a chronic illness and 42% of American adults are obese. Our collectively declining health is likely to add to national health spending. Combine these elements with the lack of transparency concerning medical costs and you have a perfect recipe for rising health insurance premiums.
Overall, healthcare in the United States is not yet consumer-centric. Employers pay for a majority of health insurance plans. Most individuals are either unable or uninterested in evaluating the medical costs of various treatments. Since most insurers pay according to a fee-for-service system, doctors, hospitals, and other medical providers are incentivized to order more services than are strictly necessary. And, six of the largest health insurance companies have an effective monopoly on the healthcare market, which decreases competitive price pressure and increases the price of premiums across the board.
That’s why today we’re discussing the possibility of writing off healthcare premiums on your annual tax return. Many people aren’t even aware this deduction could be an option for them, which means many people are missing out on thousands of dollars in returns! With the cost of health insurance on the rise and the ongoing pandemic, there’s never been a better time to learn about the options available to you for deducting health insurance costs. We’ll help you determine if you’re eligible and how to proceed from there. If you’re interested, read on!
Am I eligible to deduct my health insurance premiums?
Like many write-offs and potential deductions, your eligibility boils down to your income and your expenses. If you spend above a certain percentage of your income on healthcare costs, including but not limited to premiums, then you may qualify to deduct a portion of your expenses from your yearly tax return. However, there are stipulations and caveats to this rule.
To begin with, if you are enrolled in a healthcare plan which is sponsored by your employer, chances are your premiums are already tax-free. Likewise, if your premiums are paid through deductions taken from your paycheck, this means they are being paid with pre-tax money and therefore are not eligible to be applied as a tax deduction.
Now, if you have been paying for your health insurance and associated health costs out-of-pocket, you’re eligible to deduct if those costs exceed 7.5% of your yearly gross adjusted income. Now, let’s break this figure down. Adjusted gross income, or AGI, is the sum total of all income (including dividends, royalties, spousal support, interest, capital gains, rental income, retirement distributions, etc. in addition to wages) subtracted by “allowable deductions” (including retirement plan contributions, student loan interest payments, early withdrawal penalties, etc.). For a list of income sources and allowable deductions, refer to this resource. When you’ve determined your AGI, then you’ll be able to determine how much 7.5% of your AGI is, and this is your healthcare expenses cap. Anything above this amount can be deducted. This includes, in addition to premiums: the cost of doctor’s visits, surgeries, procedures, dental care, vision care, and mental health services.
Here’s an example. Say, for instance, you make $75,000 in a year. Let’s also say you spent $9,300 on healthcare related costs. Seven-point-five percent of $75,000 is $5,625. According to these figures, anything you spent above $5,625 is deductible (i.e. $3,675). If you make less than $75,000 annually, your cut-off point will be lower. Likewise, if you make more than $75,000, your cut-off point will be higher. If you file jointly with a spouse, you’ll need to combine your gross adjusted income to determine your corresponding cut-off point. This cut-off point is almost like an insurance deductible. A deductible is the amount you pay out-of-pocket before your insurance coverage kicks in and shoulders the cost. Similarly, you’ll need to spend 7.5% of your AGI before your tax deduction kicks in. However, because the math is super simple, you can estimate these figures at the beginning of the year and know exactly when you reach the cut-off and can expect the money you spend on healthcare costs to come back to you.
You shouldn’t include any healthcare expenses which were reimbursed by either an employer or an insurance company. As well, when applying this deduction, you’ll need to opt out of the standard deduction and choose an itemized deduction instead. Therefore, make sure your itemized deduction will exceed the standard deduction beforehand. Keep exact figures on hand, including insurance statements and medical billing, as you will not want to guesstimate when entering your itemized deductions.
What if I’m self-employed?
Being self-employed comes with its own burdens, which is why the 7.5% cut-off does not apply to those who are self-employed. That’s right! Self-employed individuals are eligible to write-off the entirety of their health insurance premiums and associated healthcare costs with no regard to its percentage of their AGI. However, there are caveats here, as well. If a self-employed person had the option to receive coverage from an employer and opted out, they are ineligible. If a self-employed person has a second job which offers coverage, they are ineligible. Or, if a self-employed person can receive coverage through a spouse’s employer-sponsored plan, they are ineligible for the deduction. Additionally, if the self-employed person owns and operates their own business, they cannot deduct more than the amount of income generated by the business in the year they’re filing the return.
Whether you operate a sole proprietorship or a limited liability corporation, your health insurance and associated medical costs are a personal matter. Instead of filing this deduction within a business form, the deduction should be filed on the self-employed person’s individual tax return (i.e. 1040, not Schedule C).
If the cost of health insurance has been a monthly pain point or been deemed economically unfeasible by you, we hope this information helped! Everyone should have access to adequate health coverage. According to a survey conducted by the Commonwealth Fund, over 43% of adults were underinsured or without coverage when the pandemic occurred. If this deduction allows you to invest in healthcare coverage and be protected when the time comes, we’ve done our part!
If you need help finding the right insurance policy for your needs, reach out to us! Everyone here at Abri Insurance is eager to assist you in your search for the best coverage. Come back here to read the latest news and discover more about how to make the insurance industry work for you! Thanks for reading! Until next time!