When Are Health Insurance Premiums Qualified Medical Expenses?

There are several instances when health insurance premiums are considered a qualified medical expense. Being classified as a qualified medical expense allows a taxpayer to deduct a portion of the expense. This allowance permits a taxpayer to deduct any qualified medical expense that exceeds 7.5 percent of a taxpayer’s adjusted gross income (AGI).

For example, if a taxpayer’s AGI is $100,000 and they incur $10,000 in qualified medical expenses, they would be permitted to deduct $2,500 since that is the amount that exceeds the 7.5 percent threshold ($7,500). Information concerning the deductibility of qualified medical expenses can be found in IRS Publication 502.

The premiums that can be deducted as a qualified medical expense are certain Medicare payments for recipients age 65 and older, COBRA payments, qualified long-term care premiums, premiums paid on a relative’s policy and contributions made to a health savings account (HSA).

Deduction of Medicare Premiums

A Medicare recipient, which is anyone who is age 65 or older, premiums paid in connection with Part B out-patient care coverage, Part C Medicare Advantage program and Part D prescription drug benefit can be deducted as qualified medical expenses. This also extends to any of the 12 Medigap or Medicare Supplement plans offered by Medicare through private insurers.

The deduction for premiums paid for Medicare Part B, C, D or a supplement plan is limited to the amount that exceeds 7.5 percent of the person’s AGI. There are no premiums charged for Medicare Part A, which is the coverage for in-patient care and hospitalization.

COBRA Premiums

When an employee separates from their employer for reasons other than being fired for cause, they are permitted to continue under the company’s employer-sponsored health plan. This is known as the COBRA option, created under the Consolidated Budget Reconciliation Act of 1985. Under COBRA a terminated employee may continue coverage up to 18 months (or 29 months if under social security disability) for an initial cost of 102 percent of the employer’s premium cost.

Because of the high expense of COBRA compared to individual and group insurance that may be available, COBRA premiums may be deducted as a qualified medical expense.

Qualified Long-Term Care Premiums

A provision with the Health Insurance Portability and Accountability Act of 1997 (HIPAA) allows the deduction of premiums paid for a long-term care insurance policy purchased as a tax-qualified plan. There are certain requirements that the plan must meet in order to be considered tax-qualified. For the most part, all long-term care plans sold in the United States after January 1, 1997 are qualified long-term care (LTC) plans. The purpose of the deduction for LTC is to encourage the purchase of private insurance in order to reduce the burden on Medicaid when a person is need of facility (skilled nursing) or home and community based care associated with long-term care needs.

Health Premium Expenses for Relatives

A taxpayer that contributes 50 percent or more for the premium cost of an immediate family member can deduct (up to the allowable limit relative to their AGI) the premium. Immediate family includes child or grandchild, mother, father or family member who is receiving direct support from the taxpayer (such as a nephew or niece living with a family member).

Health Savings Account Contributions

Those individuals who participate in health insurance plans that have a high deductible (as defined for individuals and families on an annual basis) known as high deductible health plans can contribute to a separate account. This account is called a health savings account or HSA. The HSA is subject to funding limits and the amount in the account can be used to pay for certain unreimbursed medical expenses such as deductibles, co-pays, prescription drugs and other expenses. The amount contributed to an HSA can be deducted as a qualified medical expense.

 

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