Almost all health insurance is tax deductible, but only certain kinds can be claimed on a tax return. If you have an employer-sponsored policy, don't bother. It's already deducted for you.
But if you're paying for individual coverage, you should be keeping track of the checks you write. Come tax time, you may be able to write some of it off. And depending on the circumstances, you could even save a bundle.
It all boils down to the IRS's 7.5 percent rule. This little-known provision gives you a deduction if more of your salary goes to health care. Any premiums paid for an individual health policy count toward this amount.
Here's how it works. Suppose you earn $100,000 a year. In that case, you can't deduct the first $7,500 you spend on health care. But every penny after that qualifies. The further down the income scale you go, the easier it is to hit your deductible. So if you earn $50,000, your limit is only $3,750.
This could be critical if you're on a limited income or have substantial costs. But even if you don't, you still might hit the 7.5 percent mark. This is especially true if you have a spouse or other dependents. What you spend on them counts too.
Your chances of hitting it are very good if you have individual coverage. That's because individual insurance premiums count as legitimate medical expenses. So does money spent on deductibles and copayments.
Since individual policies are expensive, you might be able to write off some of the costs. It doesn't really matter how your insurance is structured, either. You can deduct payments for:
* A preferred provider organization (PPO)
* A health maintenance organization (HMO)
* COBRA
* Medicare
* A group policy that isn't employer-sponsored
* Qualified long-term care policies
* A high-deductible health plan (HDHP)
If you have an HDHP, keep an ongoing record of your expenses. You'll be spending more on care, so you may qualify for other deductibles too.
But remember, some costs don't qualify. These include:
* Premiums for employer-sponsored policies
* Deposits into employer-sponsored flexible spending or health savings accounts
* Life insurance
* Disability insurance
* Purchases made from a health savings account
* Injury liability insurance
* Medical expenses that an insurer reimburses you for
* Medical expenses an insurer or someone else pays for up front
If you do claim an insurance deductible, the IRS will want some proof. You're required to include a photocopy of an insurance bill showing:
* Your name
* The name of the insurance company
* The monthly premium cost
* Your coverage dates
* Your policy number
You also need to enclose proof of payment. This might be a copy of a:
* Cleared check to the insurance company
* Bank statement showing the amount paid
* Credit card bill showing payment
* Receipt from the insurance company
If all this seems confusing, have an accountant prepare your return for you. But if you'd rather do it yourself, ask the IRS for a copy of Publication 502. It's the guide to approved medical and dental expenses. It lays it all out in clear and easy language.
Be sure to review it as thoroughly as possible. The list of allowable expenses is quite long. You might even find a deductible you weren't expecting.
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