Can I deduct my exchange premiums when I file taxes?

Q. I’ve always had employer-sponsored health insurance, and I believe the premiums were pre-tax. But I left that job last year, and have now purchased individual health insurance in the exchange. Do I get to deduct the premiums I’ve paid when I file my taxes?

A. If you’re self-employed, yes. If not, it will depend on how much you spend on medical expenses during the year.

When you had employer-sponsored health insurance, your share of the premium was probably payroll deducted on a pre-tax basis, and thus your W2 reflected that fact. You did not have to deduct the premiums when you filed your taxes, because they were not included in the taxable income reported to you on your W2.

Now that you’re buying your own health insurance, there are several things to keep in mind:

  • If you buy your own health insurance but you’re not self-employed, your premiums simply count as medical expenses. The IRS allows you to deduct medical expenses that exceed 7.5% of your adjusted gross  income, but you have to itemize your deductions to do so (the ACA had changed the threshold to 10 percent, but the GOP tax bill — H.R.1 — that was enacted in December 2017 returned the threshold to 7.5 percent, but only through 2018; starting in 2019, only medical expenses in excess of 10 percent of your adjusted gross income will be tax deductible). Keep track of all your medical expenses throughout the year, as they can add up quickly.
  • If you qualify for an income-based premium tax credit (aka, a premium subsidy) to lower your premiums, make sure that you continue to obtain your coverage through the exchange in your state. If you switch to an off-exchange plan, you wouldn’t be eligible for a subsidy to offset the cost of your coverage. If you buy your plan on-exchange and you’re eligible for a premium tax credit, you can either take it up-front, paid directly to your insurer each month (this is what most people do), or you can pay full price for your coverage each month and claim the full premium tax credit when you file your taxes (if you take the tax credit up-front, you’ll reconcile it on your tax return, and the total amount will be adjusted if necessary).
  • If you receive a subsidy to offset the cost of your health insurance premiums in the exchange, you cannot “double-dip” at tax time. In that case, if you’re self-employed or if your total medical expenses are high enough to allow for a deduction, you can only deduct the actual portion you paid, not the portion that was paid with the premium tax credit. Note that it can get a bit complicated if your premium deduction reduces your modified adjusted gross income and thus increases the amount of your subsidy… which in turn decreases the amount of your total premiums that you can deduct. The IRS has addressed this circular problem, and the details are here.