If you're like most American taxpayers, your health insurance premiums represent an enormous "overhead" expense. For many years, the cost of healthcare and health insurance has risen faster than the overall rate of inflation. Meanwhile, the recent passage of the Affordable Care Act has added a new layer of uncertainty to the healthcare market. Many insurers are taking advantage of this new climate of confusion by raising some of their policies' premiums by 10 percent or more per year.
If you receive health insurance through your employer, you probably won't qualify for a healthcare-related tax deduction. This is because most employers shoulder the majority of their employees' health insurance costs. On the other hand, you may qualify for a tax deduction in the event that you experience an expensive medical emergency or round of treatment during the tax year. In order to determine your eligibility for specific tax deductions, you'll need to check with your accountant or tax professional.
In general, you should qualify for a tax deduction on any healthcare costs that exceed 7.5 percent of your gross income. If you made $100,000 during the tax year and paid $15,000 in healthcare-related costs, you'll be eligible to deduct $7,500 from your top-line income figure. Although high-income earners may face certain restrictions, most regular workers are eligible to claim virtually all of their healthcare costs beyond the 7.5 percent threshold. The specifics of this deduction are spelled out in IRS Publication 502.
In order to be eligible for this tax offset, you must choose to itemize your deductions. If your standard personal deduction exceeds the value of your potential itemized deductions, it may not make sense for you to use this healthcare-related tax-reduction tool. Although it fluctuates from year to year, the personal tax deduction is capable of offsetting thousands of dollars in gross income. Unless you own a house or make charitable donations on an ongoing basis, the total value of your potential itemized deductions may not exceed that of your guaranteed personal deduction.
If you're self-employed, this healthcare deduction could be particularly useful. As a self-employed worker, you'll be responsible for covering 100 percent of your health insurance costs out of your own pocket. As such, your insurance premiums are liable to exceed 7.5 percent of your income by a significant margin. In addition, you'll be eligible for other key tax offsets, including the home-office deduction.