Can I Deduct Medical Expenses from My Taxes Under Obamacare?
As anyone who has ever bought it can tell you, health insurance is an expensive product. This was true before Obamacare was signed into law in 2010, and it’s true now. Though some people get government subsidies to help pay their monthly premiums under Obamacare, the cost of health insurance coverage has only continued to rise.
Most things as costly as health insurance will have some kind of impact on your federal taxes. But can you deduct your health insurance premiums under Obamacare? Are there any other tax implications involved with health insurance that you should know about?
In this article we’ll help you answer those questions.
Who can and who can’t deduct health insurance premiums from their taxes?
Before we go any farther, we need to make clear that the information contained in this article does not constitute tax advice. If you’re looking for advice on how to do your taxes and whether any of the things mentioned in this article apply to you, please talk with a licensed tax professional.
That said, let’s start by answering the question of who can deduct health insurance premiums from their income for the purposes of their federal taxes – because some people can.
- Employers can deduct the cost of health insurance premiums from their federal taxes. So long as they offer employees major medical health insurance coverage, they can deduct the portion of the premiums that they pay on behalf of employees and their dependents.
- People with employer-sponsored health insurance pay premiums with pre-tax dollars. The money taken from their paychecks to pay their portion of their monthly premium is generally already deducted from their taxable income.
- The rest of us typically cannot deduct health insurance premiums from our taxes, though there are some exceptions. We’ll talk more about the exceptions below.
In other words, if you’re an employer, you get to deduct what you pay toward health insurance premiums from your taxable business income. And if you’re someone who’s covered under an employer-sponsored health insurance plan, the money you’re contributing toward your coverage (or your spouse or parent is contributing) is already effectively tax-deductible.
However, if you need to go out and buy Obamacare health insurance coverage on your own, you’re out of luck. You are generally not eligible to deduct the cost of your Obamacare health insurance premiums from your federal taxable income.
Some medical expenses may be tax deductible – if you meet the minimum threshold
Before the Affordable Care Act (the real name for Obamacare) came into effect, it was possible in certain circumstances to deduct qualifying medical expenses from your taxable income when doing your federal taxes. However, you had to experience pretty significant medical costs first.
- Specifically, before Obamacare, you could only deduct that portion of your qualifying medical costs that exceeded 7% of your adjusted gross income.
- So, for example, if you had an adjusted gross income of $50,000, and qualifying medical expenses of $5,000, you could only deduct $1,500 in qualifying medical expenses from your taxes (that is, only the portion of your qualifying medical expenses that rose above the 7% threshold.
This changed under the Affordable Care Act. When major provisions of the Obamacare law came into effect in 2014, that 7% minimum threshold was raised to 10%.
- Now, if you have an adjusted gross income of $50,000 and only $5,000 in qualifying medical expenses, you are not able to deduct any of these dollars from your taxable income.
- However, if you had an adjusted gross income of $50,000 and $6,000 in qualifying medical expenses, you could deduct $1,000 from your taxable income.
In other words, under the Affordable Care Act, it is more difficult to deduct qualifying medical expenses from your taxable income than it was before Obamacare became law.
What are some examples of qualifying medical expenses under the law?
Medical expenses which qualify as potentially tax-deductible under the law are defined in IRS Publication 502. There’s a broad range of qualifying medical expenses and we can only list a few examples here, but you may be able to deduct money you paid toward:
- Your copayments or your deductible under an Obamacare health plan
- Coinsurance (another form of cost-sharing) under your health insurance plan
- Prescription drugs and over-the-counter drugs, even those not covered by your health plan
- Mileage to and from medical appointments
- Vision or dental care
- Laser vision surgery
- Various medical procedures which may not be covered by your health insurance plan
- Home medical equipment
- Home improvements to aid in the accessibility of your home for medical reasons
- Chiropractic care or acupuncture
- Premiums paid for long-term care or nursing care insurance
- …and more
Remember that you may only be able to deduct these expenses from your taxable income to the degree to which qualifying expenses exceed 10% of your taxable income. Work with a licensed tax professional for clarification and help understand how these rules may apply to you.
Refer to IRS Publication 502 for a more complete list of qualifying medical expenses.
Are there other ways to deduct medical expenses from my taxable income?
In fact, there are. If you have a health insurance plan that meets certain criteria you may be eligible to open a Health Savings Account, which will allow you to save money on a pre-tax basis for qualifying medical expenses.
Health Savings Accounts were created during the George W. Bush administration but were retained under the Affordable Care Act.
Anyone can open a Health Savings Account, but as of 2016 you can only legally deposit money into your Health Savings Account if your Obamacare health insurance has:
- An annual deductible of at least $ 1,300 for individuals or $2,600 for families
- An annual maximum out-of-pocket limit of no more than $6,550 for individuals or $13,100 for families
Money may be contributed to your Health Savings Account (also known as an “HSA”) by either yourself or your employer on a pre-tax or tax-deductible basis. Either way, the money in the account is yours to keep and will roll over and grow from year to year if you don’t withdraw it.
Withdrawals from your HSA are also tax free so long as you use the funds to pay for qualifying medical expenses (see IRS Publication 502). If you use the money in the account for anything other than qualifying medical expenses, it will be taxed as income and you will need to pay a 20% penalty as well.
Contribution limits for HSAs
There are limits to how much money may be contributed to your HSA each year. For 2016, the maximum contribution limits are:
- $3,350 for individual plans
- $6,750 for family plans (that is, with two or more people enrolled in the same policy)
People aged 55 or older may also contribute an additional $1,000 per year.
Obamacare subsidies can also affect your federal taxes
Here’s another thing to be aware of, though it doesn’t directly relate to the tax-deductibility of your health insurance or medical care.
Under Obamacare, many consumers qualify for government help to pay their monthly premiums. If you earn no more than 400% of the federal poverty level (about $47,500 for a single person or about $97,000 for a family of four), you may be eligible for Obamacare subsidies.
The amount of subsidies you’re awarded is based on your estimated income for the year. When tax time comes around, however, any discrepancies in the value of the subsidies you got and the value of the subsidies you were finally eligible for needs to be reconciled.
That means, if you earned more than expected, you may need to pay back some (or potentially all) of the Obamacare subsidy dollars you received during the prior year. Conversely, if you earned less than expected, you may be due additional subsidy assistance.