Insurance and Other Medical Tax Deductions

A man looking at a diagram With the introduction of the Tax Cuts and Jobs Act, many taxpayers are wondering how it will affect the tax deductibility of their medical items – like insurance.  Largely, the new tax bill has left these deduction as they were, albeit perhaps harder to take the itemized deductions

The first medical deduction that most people thing of is actual medical expenses.  To the extent your qualified medical expenses for your entire household (including qualified dependents) are more than 7.5% of your 2018 adjusted gross income, you can still take these deductions on Schedule A of your 1040 Federal return.  This percentage will increase back to the 10% in 2019 and beyond.  The obvious strategy here is to schedule as many medical procedures as possible in a single year, preferably 2018.  One important item of note is to know if any of your out of pocket expenses will be reimbursed by your insurance company at a later date.  If this does occur, you will be required to report that reimbursement as income if you took a deduction for the full value of the expense.  The items that are deductible as medical expenses include: preventative care, substance abuse treatment, surgery, dental, vision, lab work, acupuncture, some respiratory relief, certain psychologists and psychiatrists, prescription medication, equipment, certain cosmetic surgery, hospitalization, medically necessary costs as prescribed by your physician, co-pays, travel to and from medical appointments, nursing care and in-home care, hospice, and more.  See IRS Publication 502 for the full list.   Medical expense must be paid out of pocket with after tax dollars.  This means that you cannot include the medical expenses that you paid for with funds from your HSA for FSA.  Contributions to an HSA or FSA by your employer are not tax deductions to you.

Health insurance too is only deducible if you pay for it with after tax dollars.  Medicare Part A premiums can be deducted if a taxpayer is not covered under Social Security and is voluntarily enrolled in Medicare Part A.  Medicare Part B and Part D can also be deducted.  If your health insurance is paid for by your employer, or deducted from your paycheck pre-tax, you cannot deduct these premiums.  Likewise, you can not deduct any healthcare subsidy from state or federal governments.  If you use your health insurance premiums paid as a deduction against your self-employed income, you cannot also take it against your Schedule A medical expenses.  Self-employed health insurance can be taken as a deduction even if you are not able to itemize.

Disability insurance premiums are often overlooked by many as deductions on their return.  These premium deductions can be tricky though.  While the IRS allows for self-employed taxpayers to deduct the “overhead insurance” that pays for business overhead expenses, it does not allow for deduction of premiums that pay for lost earnings during sickness or disability.  Additionally, if you deduct the cost of your premium, benefits paid from the policy are then considered taxable income.  However, if you do not use the premiums as a deduction, then the payouts can be used tax-free.  And again, if your employer paid for your premiums, then the benefits are taxable to you.  Check with your accountant to make sure that your premiums are being handled in the most advantageous way for you.

The premiums for qualified long-term care insurance are also deducible on Schedule A of For 1040.   However, there is a limit on how large a premium can be deducted depending on the age of the taxpayer at year-end.  Any premium amounts for the year above the limit are not considered to be a medical expense for the deduction.  To be considered qualified plans, the policy must adhere to offer both activities of daily living (ADL) and cognitive impairment triggers.  Benefits from reimbursement policies, which pay for the actual services a beneficiary receives are not include in incomes.  Per dies policies are not included in income except amounts that exceed the beneficiary’s total qualified long-term care expenses or the daily limit for the year, whichever is greater.

Health Savings Accounts (HSA) are one way to benefit with a tax-advantaged savings component with a high-deductible health insurance policy.  HSA contributions are tax-deductible, even for those that do not itemize.  Earnings in a Heath Savings Account accumulate tax-free.  And, provided you use the distributions for qualified medical expenses, these funds remain tax-free. With HSAs, the funds can be rolled from year to year within the account to aid with upcoming medical bills.  Like the HSA, FSAs are medical flexible spending accounts.  These let you set aside before-tax money with which to pay out of pocket medical expenses.  The drawback to the FSA is that you must utilize the money within the year.   Some employers offer a Health Reimbursement Account which will reimburse employees for certain qualified medical expenses and the reimbursements are tax-free.  In general, these policies roll over form year to year.

Life insurance premiums are deductible as business-related expenses if the insured is an employee or corporate officer and the company is not the direct or indirect beneficiary of the policy.  The death benefits are generally tax-free to the individual policy owner, although death benefits for business-related beneficiaries can have certain situations where it can become taxable.  Employers offering group-term life coverage to employees can deduct premiums they pay on the first $50,000 of benefits per employee.

With TCJA effectively doubling the standard deduction, for all filing statuses, the itemization deduct will be harder to achieve.  In many cases it may be better to use a pre-tax savings plan to pay for out of pocket medical expenses.  Any medical expense that are paid out of an HSA, FSA or HRA are effectively one hundred percent tax deductible.  However, if it appears that you do have enough itemized deductions to claim them, then including the medical expenses may offer you even more tax savings.

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