Taxpayers have a few opportunities to deduct health care and medical costs when computing taxable income. These opportunities could result in either a deduction to adjusted gross income (“AGI”) or a deduction from AGI, with the former typically being more advantageous than the latter.
Health care costs that may be deductible include:
- Health insurance premiums paid by a sole proprietor;
- Contributions to a Health Savings Accounts (“HSA”); or
- Itemized medical expenses.
Sole proprietors can deduct premiums paid for medical, dental or long-term care insurance coverage (NOTE: the policy may be in the name of business or the sole proprietor) for themselves and their spouse, dependents and children under age 27 (even if not a dependent). The premiums can be deducted as an adjustment to AGI if:
- The self-employed individual is not eligible to participate in any subsidized health plan maintained by an employer; and
- The deduction does not exceed the net profits reported on Schedule C minus the deductions for self-employment tax and contribution to a self-employed SEP, SIMPLE or qualified plan.
If the insurance premiums are not deductible to AGI because of the preceding limits, then they can be deductible as an itemized medical expense on Schedule A (except for the amount attributable to the non-dependent child under age 27).
A HSA allows individuals to save for qualified medical expenses on a tax-free basis. Earnings in the account are not taxable and distributions from the account are not included in income if used to pay for qualified medical expenses. Any individual who is only covered by a high deductible health plan can establish and contribute to a HSA. The annual contribution to the account can be deducted as an adjustment to AGI up to the allowable deduction limits. The current deduction limit is $3,300 for an individual under age 55 ($4,300 for an individual 55 or older), and $6,550 for a family under age 55 ($7,550 for a family 55 or older).
To qualify as a high deductible health plan and thus be eligible to contribute to a HSA, the policy must have a minimum annual deductible of $1,250 for self-coverage ($2,500 for family-coverage), and a maximum annual deductible and out-of-pocket expenses of $6,350 for self-coverage ($12,700 for family-coverage).
Most health care costs that do not qualify for a deduction to AGI under one of the two preceding deductions, will typically qualify as itemized medical expenses on Schedule A. These expenses will be deductible from AGI if they exceed certain limitations.
Contact Flexible Accounting Services of the Triangle today to see how you can use maximize the deduction for health care costs you incur for yourself and your family.