Q. If an individual pays for an exchange plan, how do they pay for the premium pre-tax, the way they would if they had an employer-sponsored plan? This can be a substantial cost impact for the middle-class taxpayer who doesn’t qualify for the tax credit/subsidy. If you itemize, you do not get the full benefit that other taxpayers get. Am I missing something?
A. If you’re self-employed, you can generally deduct the full amount you pay in premiums without having to itemize your deduction. (Here’s more the self-employed health insurance deduction.)
But if you’re not self-employed, the only way to deduct your health insurance premiums is to itemize your deductions. You can only deduct your total medical expenses that exceed 7.5 percent of your AGI, although health insurance premiums count towards your total medical expenses. So as an example, if your AGI is $60,000 and your total medical expenses are $8,000 for the year (including health insurance premiums), you’d be allowed to deduct $3,500 in medical expenses as part of your itemized deductions on schedule A. (7.5 percent of $60,000 is $4,500, so you’re allowed to deduct the portion of your total medical expenses that exceeds $4,500).
Note that the medical expense deduction threshold used to be 7.5 percent of income, but the ACA changed it to 10 percent (it remained 7.5 percent for people age 65 or older, through 2016). The GOP tax bill that was enacted in December 2017 put the medical expenses deduction back to 7.5 percent, but only for 2017 and 2018. Starting in 2019, it will revert to 10 percent for all tax filers. This provision in the tax bill was championed by Senator Susan Collins (R, Maine), in an effort to help consumers. It will make it easier for people to deduct medical expenses (including premiums) in 2017 and 2018, as the total expenses won’t have to be a high, relative to income, to trigger the deduction.
The deductibility of health insurance premiums is an issue that has come up in health reform discussions many times over the years, and it’s undeniable that employees who must purchase their own health insurance are at a disadvantage tax-wise. Future legislation could change this, but for now, individual health insurance premiums are generally not deductible without itemizing unless you’re self-employed.