Can I get a tax deduction for health insurance?
(MoneyWatch) Interested in buying insurance on the new health exchanges created under the Affordable Care Act? A first step is to compare the premium of the health insurance plans offered on the exchanges with what an employer's health plan costs.
Premiums will vary by state on the exchanges, so you'll need to use the one offered in the state where you are a resident. It's important to know that the premiums for the insurance on the exchange is based on where you live, your age, the number of people in your family you are covering and whether you smoke.
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But another important consideration are the tax benefits. You use pre-tax dollars to pay for the health insurance through your employer and use after-tax dollars when you buy the insurance through the exchange. So can you deduct the costs you pay for health insurance premiums? As is the case with most tax questions, the short answer is it depends.
If you are self-employed, you may be able to take a tax deduction for the premiums you pay for medical, dental and even qualifying long-term care insurance for you and your family. This deduction is in the form of an adjustment to income and is taken on page one of your form 1040. You can claim it even if you do not itemize deductions or your other deductions are limited. This can also lower your adjusted gross income, which helps to lessen the sting of income-related phase outs of other deductions, such as those that apply to itemized deductions you claim on Schedule A.
If you are an employee, and you pay for health insurance with after-tax dollars through the exchange, then the best you can do is to deduct these costs as medical expenses on Schedule A Itemized Deductions. This deduction is limited. Only the amount of health insurance premiums you pay, combined with all medical related costs, you can deduct is those that that exceed 7.5 percent of your AGI. Needless to say, it's better tax-wise to have health insurance premiums paid with pre-tax dollars, as is the case when you are an employee.
In 2014, small business owners will also qualify for new tax breaks credits when they buy health insurance on the new health insurance marketplace program called Small Business Health Options Program, or SHOP. The SHOP Marketplace will be available to employers with 50 or fewer full-time-equivalent employees and will provide special tax credits to qualifying employers when they buy health insurance for their employees.
