Many consumers overlook deductions built into the U.S. tax code that are designed to make health insurance more affordable. People who are self-employed, who pay for their own individually purchased health insurance, or who were on COBRA in 2010 should educate themselves on the federal tax implications of health-insurance coverage.
While the tips below don’t constitute tax advice, eHealthInsurance Services Inc., the company that compiled the list, recommends that consumers explore these issues with a certified public accountant or a tax professional when preparing their federal income-tax returns for tax year 2010.
New this year—Take a one-time opportunity to reduce self-employment taxes. In addition to the standard “above the line” deduction described below, self-employed people can also deduct the cost of their health-insurance premiums from their self-employment taxes on Schedule SE. This is a one-time-only opportunity available for 2010 taxes.
Deduct health-insurance premiums as a business expense. If the filer had self-employment income in 2010, the person may also be able to deduct health-insurance premiums paid for the filer and dependents as an “above the line” business expense (that is, without itemizing) on the federal return. Be aware, however, that one may not deduct premiums paid for any month in which one was eligible to participate in an employer-sponsored health-insurance plan, and that the amount deducted can’t be greater than net self-employment income for the year. Also, keep in mind that one can’t include what one paid toward monthly premiums as an “above the line” expense and also itemize it as described in the next tip. Talk with a tax professional to learn more about the different types of self-employment status and the tax implications of each in one’s own state.
Itemize health-insurance and medical expenses. Even if one isn’t self-employed, if one itemizes on the federal return one may be able to deduct medical expenses from taxable income. According to IRS Publication 502, qualifying medical expenses may include monthly premiums the filer paid for coverage (including some Medicare premiums), copayments, deductibles, dental expenses, and costs for some services not covered by one’s insurance plan. Keep in mind that one can deduct only the portion of medical expenses that exceeds 7.5% of adjusted gross income. That means this deduction isn't for everyone, but if the filer (or a dependent) was seriously ill or hospitalized last year—or if the filer paid COBRA premiums (without receiving federal subsidy)—he or she may qualify.
Maximize the refund with a Health Savings Account (HSA). An HSA is a tax-advantaged savings account used in conjunction with an HSA-eligible health-insurance plan. Account contributions, qualified distributions and earnings are all tax-exempt. An HSA allows one to deposit a portion of pretax income into a savings account and use those funds to pay for qualified medical expenses. Unused money can be invested and accrue from year to year. If one has an HSA, be sure to deduct one’s contributions up to federally prescribed limits. Contributions to an HSA designated for 2010 and made before April 18, 2011, can be counted toward 2010 federal taxes. According to IRS Publication 969, HSA contributions for the 2010 tax year are capped at $3,050 for individuals and $6,150 for families.
Be aware of how the COBRA subsidy may alter taxable income. Filers enrolling in COBRA as the result of a layoff after June 1, 2010, don’t qualify for the 65% federal COBRA subsidy, but plenty of people who did qualify for the subsidy were still receiving it in 2010. If the filer received the COBRA subsidy, taxable income may increase, depending on how much money the filer made in 2010. If adjusted gross income was between $125,000 and $145,000 ($250,000-$290,000 for those filing joint returns), the filer may be eligible to retain only a portion of that subsidy. If adjusted gross income was greater than $145,000 ($290,000 for joint filers), the filer isn’t eligible for the subsidy and should carefully review tax liability for the subsidy.
Please note that the provisions described above may apply differently based on individual circumstances. A local certified public accountant or tax professional can advise in light of those circumstances.