Expert Insights To Help You Make Smarter Financial Decisions
ValuePenguin has curated an exclusive panel of professionals, spanning various areas of expertise, to help dissect difficult subjects and empower you to make smarter financial decisions. Read on for more auto insurance insights.
- Samuel Handwerger
The commentary provided by these industry experts represent their viewpoints and opinions alone.
Other Medical Expenses That Are Tax Deductible
The IRS will let you take a deduction on any medical expenses paid out of your own pocket that were ordered by a doctor or health care professional. For a complete list of acceptable medical expenses, you can visit the IRS.gov website. But, some common expenses include:
- Long-term care
- Contact lenses
- Birth control
Along with these direct medical expenses, the IRS will also allow you to deduct any travel costs that you may have incurred when going to get medical care. For example, if you have a physical therapy appointment that is one hour from your residence, you could deduct the cost of gas as a medical expense.
Who Qualifies For Medical Expense Tax Deductions
The Internal Revenue has two critical eligibility rules for people who dont own a business:
- A standard deduction is $12,400 for singles, $18,650 for heads of household and $24,800 for married joint filers for the 2020 tax return. If your tax deductible health insurance costs dont exceed those limits, its best to go with a standard deduction rather than itemize your health care deductions.
- Your health care costs must exceed 7.5% of your adjusted gross income for 2020 tax filings. The AGI is what you earn in wages, investments and other sources minus things like alimony and student loan interest. You can find your adjusted gross income on line 37 of Form 1040. Note: starting with 2021 taxes, medical costs will have to exceed 10% of your AGI.
So, the first question to answer is: How many eligible health care costs do you have? If your health care costs are less than the standard deduction amount, you should take the standard deduction instead.
Chris Peterson, tax manager at CB Smith & Associates, said most people take the standard deduction rather than itemize health care deductions because they dont exceed the standard deduction level.
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Dental And Optical Treatment
You cannot get tax relief for routine ophthalmic and dentalcare. Routine ophthalmic treatment covers sight testing, provision andmaintenance of glasses and contact lenses. You can get tax relief for orthopticor similar treatment where prescribed by a doctor. Routine dental treatmentcovers extractions, scaling and filling of teeth and provision and repairing ofartificial teeth and dentures.
The following dental treatmentsdo qualify for taxrelief:
- Periodontal treatment
- Orthodontic treatment
- Surgical extraction of impacted wisdom teeth: this qualifies for tax relief when it is undertaken in hospital
Lower Your Health Care Costs
Itemizing medical expenses is just one way to lower your health care costs. Your employer may offer a Flexible Spending Account , or you may be able to set up a Health Savings Account both provide tax advantages to reduce the cost of health care.
If you pay any health insurance premiums out of pocket, know that a late or missed payment can negatively affect your . Consider setting up automatic payments to ensure that both you and your credit stay in good health.
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The Medical Expense Deduction
Health insurance costs are included among expenses that are eligible for the medical expense deduction. You must itemize to claim this deduction, and its limited to the total amount of your overall costs that exceed 7.5% of your adjusted gross income in the 2020 tax year, the return filed in 2021.
This threshold was historically 7.5% until 2013 when it increased to 10%, although it remained at 7.5% for taxpayers who were age 65 or older, at least for a little while. Then, as of December 31, 2016, all taxpayers were supposed to meet the 10% threshold to be able to claim this deduction, regardless of their age.
The Tax Cuts and Jobs Act restored the threshold to 7.5% retroactively for 2017 and going forward through 2018. It was slated to hike back up to 10% in 2019, then the Further Consolidated Appropriations Act extended the 7.5% threshold indefinitely.
Deduction Of Medical Expenses
Costs of health insurance are included in expenses eligible for the deduction of medical expenses. To calculate this deduction, specify the item that is limited to the total amount of total costs exceeding 7.5% of adjusted Gross Income in 2019.
This rule is usually mathematically unfavorable unless you incur significant other medical costs in addition to your insurance premiums. You can include them to help you exceed the 7.5% threshold.
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What If I Am Self
As a self-employed individual, you are in a unique situation. If your business has employees and you happen to be providing them with a health plan , then you can claim the premiums as long as they are considered to be a reasonable business expense. Your employees, on the other hand, cannot.If you do not have any employees, you may be eligible to deduct premiums that you pay for medical and dental insurance coverage for yourself, your spouse, and your dependents. Refer to the CRA website for more details.
Salaries Wages And Benefits
You can deduct gross salaries and other benefits you pay to employees.
Do not include:
- salaries and wages such as direct wage costs or subcontracts
- drawings of the owners of the business
- salaries or drawings of the owners of the business since salaries or drawings paid or payable to you or your partners are not deductible
The Canada Pension Plan is for all workers, including the self-employed. Employers, employees and most self-employed individuals must contribute to the CPP. The CPP can provide basic benefits when you retire or if you become disabled. When you die, the CPP can provide benefits to your surviving spouse or common-law partner and your dependent children under 25. For more information on contribution and benefits, visit Service Canada.
Quebec workers including the self-employed are covered under the Quebec Pension Plan .
As the employer, you can deduct your part of the following amounts payable on employees’ remuneration:
- CPP or QPP contributions
- Provincial parental insurance plan premiums, which is an income replacement plan for residents of Quebec
- workers’ compensation amounts for your employees
You report each salary by the end of February on a T4 slip, Statement of Remuneration Paid, or T4A slip, Statement of Pension, Retirement, Annuity and Other Income.
You can deduct the salary you pay to your child, as long as you meet all these conditions:
For more information, see guide RC4120, Employers’ Guide Filing the T4 Slip and Summary.
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Premiums Paid With Pretax Dollars
This deduction is not available to individuals who have paid health or dental insurance premiums on a pre-tax basis. Pre-tax occurs when an employer subtracts the amount of the health or dental insurance premium from an employee’s gross wages before withholding federal and state income taxes and calculating FICA. See your payroll department if you do not know whether or not your health or dental insurance was paid on a pre-tax basis.
The federal Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan. This reporting is for informational purposes only and will provide employees useful and comparable consumer information on the cost of their health care coverage paid by the employer in box 12 of the W2, code DD. The code DD amount is paid by employers and is not used for tax purposes.
If one spouse is employed and has health or dental insurance premiums paid through his or her wages, that spouse will claim the entire deduction. If both spouses pay health or dental insurance premiums through their wages, each spouse will claim what that individual paid.
Business Tax Fees Licences And Dues
You can deduct any annual licence fees and some business taxes you incur to run your business.
You can also deduct annual dues or fees to keep your membership in a trade or commercial association, as well as subscriptions to publications.
You cannot deduct club membership dues if the main purpose of the club is dining, recreation, or sporting activities.
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How Do Health Reimbursement Arrangements Affect S
Many S-corp owners want to know how these rules factor into their eligibility to participate in a health reimbursement arrangement .
Because HRAs are only eligible for W-2 employees, and S-corp owners are taxed as shareholders, S-corp owners and their families arent considered employees and therefore arent allowed to participate in an HRA.
Some S-corp owners want to participate in an HRA solely to track their expenses, but this isnt permitted either. HRAs function as a reimbursement benefit, and when insurance policy premiums are reimbursed, they arent considered to be established by the business. This means S-corp owners and their families wouldnt be able to deduct those expenses even if they participated in the HRA for tracking purposes.
However, S-corp owners can still offer an HRA to non-owner employees. HRAs allow the S-corporation to have complete control over their budget while giving employees the freedom to choose how they spend their healthcare allowance.
Why Does The Standard Deduction Matter
Standard deductions increase from year to year. For 2021, they’re set at $12,400 for single filers and those who are married but file separate returns, $18,650 for head of household filers, and $24,800 for married taxpayers filing joint returns and qualifying widows.
You’d need a lot of medical costs to exceed these amounts. But note that when you itemize, you can include other costs outside of health care, such as mortgage interest, to add up to more than your standard deduction. You can compute the total of your itemized deductions using Schedule A, which you must submit with your tax return when you file it.
Publication 502issued by the IRS further details the medical and dental expenses that can be claimed on Schedule A.
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Another Alternative: Using Your Hsa Funds To Pay Medicare Premiums
If you have a health savings account , know that you can withdraw tax-free money from the account and use it to pay your premiums for Medicare Parts A, B, C, and D . This is an alternative to deducting your premiums on your tax return, since you cant do both. But its something to keep in mind if you would otherwise have to use after-tax money to cover your Medicare premiums.
You cant continue to contribute to your HSA after youre enrolled in Medicare, but you can continue to withdraw funds from your HSA. As long as you use them for a qualified medical expense, which includes premiums for Medicare Parts A, B, C, and D, you dont have to pay taxes on the money.
Other Ways To Lower Your Tax Bill
If youre not eligible to deduct your health insurance premiumseither because you dont meet the cost threshold or because you opt to take the standard deduction when you’re filing taxesthere are other ways to reduce your overall medical expenses.
You might consider electing a high-deductible health plan as a type of insurance coverage. HDHPs typically offer lower premiums than other plans. They also offer the unique feature of enabling plan subscribers to open up a Health Savings Account , a tax-advantaged savings account. Money that is contributed to an HSA account can be used to pay for out-of-pocket healthcare expenses. Your contributions to an HSA are tax-deductible and, when used for eligible expenses, your withdrawals are tax-free, too.
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Leaving Or Losing A Job Typically Means Losing The Employer
When that happens, you could buy a medical plan from a private insurer or from the federal or state marketplaces established by the Affordable Care Act of 2010. But the premiums could be higher, especially if your employer covered a portion of the monthly premium costs as many do. And the benefits might not match what you had through your employers plan.
Another option is to continue on your employers plan and shoulder the total costs yourself. The Consolidated Omnibus Budget Reconciliation Act of 1985, or COBRA, allows you to temporarily extend your coverage at your own expense under your employers group health plan for you and your family. Although this can be a less stressful and less time-consuming alternative to finding your own health coverage, it can be a costly option.
Typically, youll have to pay 100% of the premium costs the portion you paid before losing your job and the portion your employer paid plus an additional 2% for administrative costs. And if you receive an 11-month extension of coverage for a disability, your expense may be as much as 150% of the total cost of coverage.
Still, if you need to maintain the same level of benefits as you had while employed, COBRA can help you do that at least temporarily. And you may be able to defray some of the expense by deducting qualified COBRA premiums on your federal income tax return.
Lets look at how COBRA works, and how you might be able to deduct your COBRA premiums.
What Medical Supplies Are Tax Deductible
Equipment and supplies You may deduct any expenses relating to back supports, crutches, and wheelchairs, to name a few items. Artificial limbs and eyes may be deducted. If you have impaired hearing, you may deduct hearing aids. Buying a wig may be deductible if its advised by a doctor for a patients mental health.
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Maybeif Your Healthcare Costs Are High Enough
For some Americans, health insurance is one of their largest monthly expenses, leading them to wonder what medical expenses are tax-deductible to reduce their bill. As the price of healthcare rises, some consumers are seeking out ways to reduce their costs through tax breaks on their monthly health insurance premiums.
If you are enrolled in an employer-sponsored health insurance plan, your premiums may already be tax-free. If your premiums are made through a payroll deduction plan, they are likely made with pre-tax dollars, so you would not be allowed to claim a year-end tax deduction.
However, you may still be able to claim a deduction if your total healthcare costs for the year are high enough. Self-employed individuals may be qualified to write off their health insurance premiums, but only if they meet certain criteria. This article will explore tax-deductible medical expenses, including the criteria for eligibility.
Itemized Deduction: You Dont Have To Be Self
Any itemized deduction should be weighed against the standard deduction amounts. For 2021, the standard deduction is $12,550 for individuals, $25,100 for married joint filers, and $18,800 for those who file as head of household. Most people come out ahead with the standard deduction, but the best approach will depend on your specific circumstances.
If you are planning to itemize, you can include out-of-pocket medical expenses that exceed 7.5% of your adjusted gross income . Your Medicare premiums, deductibles, coinsurance, and copayments can all be counted towards your total medical costs, as well as other medical costs that might not be covered by Medicare at all, such as dental, vision, hearing, and long-term care expenses.
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Are You Paying A Lot For Cobra
When you elect COBRA insurance to stay on your work health plan, you pay your portion and the subsidy your employer had paid. If a third-party administrator coordinates the enrollment and billing they may add a 2% fee on top. In other words, you pay the whole premium and then some.
COBRA Insurance Knowledge Base General insurance information provided on COBRA Insurance Website is not intended to substitute for informed professional medical, psychological, tax, legal, investment, accounting, governmental, or other professional advice. COBRAinsurance.com does not endorse, and expressly disclaims liability for any product, manufacturer, distributor, service, health marketplace, health plan, or service provider mentioned or any opinion expressed in the website. Replies, comments, or information gathered on COBRAinsurance.com website may not be accurate, but are intended to be helpful. Shannon Kennedy, Licensed Agent. CA Licensed #0D43589
Are Health Spending Accounts Legal
Yes an HSA is legal in Canada – as long as the guidelines are adhered to. To properly satisfy the conditions set forth by CRA, make sure you choose a reputable provider and understand what you are purchasing.
Note: A Health Spending Account only works for incorporated business owners, such as an incorporated contractor, Professional Corporations, or incorporated small business with arms length employees. There are more eligible businesses, these are just a few examples.
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