Health insurance premiums are generally not tax-deductible on your federal return, even if you bought coverage through the Affordable Care Act marketplace

Most people cannot write off what they pay for health insurance premiums when they file taxes. The IRS does not treat health insurance the same way it treats some other expenses. However, there are specific situations where you can reduce your tax bill using health insurance costs — and the rules depend on how you get your coverage and who pays for it.

If you bought a plan through Healthcare.gov or your state's ACA marketplace and paid the full premium yourself, you cannot deduct those payments. The money you spent is not deductible on your 1040 form. What you can do is claim the premium tax credit, which is different from a deduction. The credit reduces what you owe in taxes or increases your refund, and it is based on your income and the cost of the second-lowest silver plan in your area.

Key Takeaways

  • Self-employed people can deduct health insurance premiums paid for themselves and their families, but only if they have net self-employment income.
  • If you are an employee and your employer pays part or all of your premium, that money is not taxable income to you and does not appear on your tax return.
  • The premium tax credit you receive when you buy ACA marketplace coverage is not the same as a deduction and works differently on your taxes.
  • Health Savings Account contributions can lower your taxable income, and money in the account can pay for medical expenses tax-free.

When self-employed people can deduct health insurance

If you are self-employed and pay your own health insurance premiums, you can deduct them — but only under certain conditions. You must have a net profit from your business for the year. You cannot deduct more than your net self-employment income, and you cannot deduct premiums for any month in which you were may be able to access for an employer plan through another job.

The deduction appears on Schedule C (if you are a sole proprietor) or on the appropriate business form for your business structure. You report it on line 29 of Form 1040. This is an "above-the-line" deduction, which means it reduces your adjusted gross income before you take the standard deduction or itemize. That makes it more valuable than most other deductions.

Self-employed people often buy coverage through the ACA marketplace. If you do, you can still claim this deduction for the premiums you paid out of pocket. The premium tax credit you received is separate — it reduced your monthly bill, and you do not deduct it again on your taxes.

How employer-paid premiums work on your taxes

When your employer pays part or all of your health insurance premium, that money is not considered taxable income to you. It does not appear on your W-2 form, and you do not report it on your tax return. This is one of the largest tax benefits in the U.S. tax code, but it works invisibly — you do not claim it because your employer handles it.

If your employer offers a cafeteria plan (also called a Section 125 plan), you can choose to have your premium payments deducted from your paycheck before taxes are calculated. This reduces your taxable wages and lowers both your income tax and your Social Security and Medicare taxes. Again, you do not claim this on your return; your employer processes it through payroll.

Premium tax credits and how they differ from deductions

The premium tax credit is a refundable tax credit available to people who buy coverage through the ACA marketplace and meet income requirements. It is not a deduction. A credit is more powerful than a deduction because it reduces your tax bill dollar-for-dollar, whereas a deduction only reduces the income that gets taxed.

When you enroll in a marketplace plan, you can choose to have the credit paid directly to your insurance company each month, which lowers your premium. Or you can pay the full premium yourself and claim the credit when you file your taxes. If you received advance credit payments during the year, you will need to reconcile them on Form 8962 when you file. If your income changed during the year, you may owe back some of the credit, or you may receive a larger refund.

You cannot claim both a deduction for the same premium and a credit for the same premium. If you are self-employed and bought a marketplace plan, you deduct the premium and claim the credit separately — they do not overlap.

Health Savings Accounts and tax-deductible medical costs

If you have a high-deductible health plan (HDHP), you may be able to open a Health Savings Account (HSA). Contributions you make to an HSA are tax-deductible, and the money grows tax-free. When you use HSA funds to pay for may have access to medical expenses — including insurance premiums in certain situations — that withdrawal is also tax-free.

You can use HSA money to pay for your own COBRA premiums (continuation coverage after you leave a job), premiums while you are receiving unemployment benefits, and long-term care insurance premiums. You cannot use HSA funds to pay for regular health insurance premiums unless you fall into one of these categories. If you use HSA money for non-may have access to expenses, you owe income tax on the withdrawal plus a 20 percent penalty.

Medicare premiums and tax deductions

If you are retired and pay Medicare premiums, those premiums are not deductible on your federal income tax return. However, if you are self-employed and still working, you can deduct Medicare premiums you pay for yourself using the same self-employed deduction described above. Once you are on Medicare and no longer self-employed, the deduction no longer applies.

Some people itemize deductions and include medical expenses on Schedule A. Medicare premiums can be part of your total medical expenses, but only the amount above 7.5 percent of your adjusted gross income is deductible. For most people, this threshold is too high to make itemizing worthwhile.

What to report on your tax return

If you are an employee, you do not report health insurance premiums on your tax return at all — your employer handles the tax treatment. If you are self-employed, you report the deduction on line 29 of Form 1040. If you bought marketplace coverage and received a premium tax credit, you report it on Form 8962 and transfer the result to your 1040.

Keep records of what you paid for premiums, any employer contributions, any credits you received, and any HSA contributions. If you are audited, the IRS will ask for documentation. Your insurance company or marketplace will send you a Form 1095-B showing your coverage, and your employer will report contributions on your W-2.

Frequently Asked Questions

Can I deduct ACA marketplace premiums if I paid them myself?

No, you cannot deduct marketplace premiums on your tax return. However, you may be able to claim a premium tax credit if your income is below certain thresholds. The credit reduces your tax bill or increases your refund. This is different from a deduction and is the main tax benefit for marketplace coverage.

What if my employer pays part of my premium?

The part your employer pays is not taxable income to you and does not appear on your tax return. Your employer handles the tax treatment through payroll. You only report the portion you pay yourself, if any, and that is usually deducted from your paycheck before taxes.

Can I use an HSA to pay health insurance premiums?

Only in specific situations. You can use HSA funds to pay COBRA premiums, premiums while unemployed, and long-term care insurance premiums. You cannot use HSA money for regular health insurance premiums unless you fall into one of these categories. Using HSA funds for other expenses triggers income tax and a 20 percent penalty.

Do I report the premium tax credit on my tax return?

Yes, if you received advance credit payments during the year, you must report them on Form 8962 when you file. This form reconciles what you received with what you were actually may have access to to based on your final income. The result transfers to your 1040.

Can I deduct health insurance if I am self-employed?

Yes. Self-employed people can deduct health insurance premiums on line 29 of Form 1040, but only if they have net self-employment income for the year. You cannot deduct more than your net profit, and you cannot deduct premiums for months when you were may be able to access for an employer plan elsewhere.