If you’re self-employed, there are an overwhelming number of options to saving on medical expenses and Health insurance. Generally, there are three options to deducting health expenses and it is important to understand the differences between each. These three options include: Health Insurance Premiums Deductions, Premium Tax Credit (PTC), and deducting approved medical expenses. Don’t worry! If you’re not sure what these mean, we’ll break down what each of these mean for you.
1. Health Insurance Premiums Deductions
While employees often have access to their company’s private healthcare, most self-employed workers end up purchasing health insurance, dental, and long-term care premiums on their own. This usually means paying higher premiums and going through a tedious application process.
However, thanks to the Self-Employed Health Insurance Deduction, you can reduce your Adjusted Gross Income (AGI) by deducting the cost of your monthly health insurance payments. It’s available to you if:
- You are a self-employed individual (e.g.. Drive for Doordash full-time)
- You have a business profit
- You are ineligible to participate in an employer-subsidized health plan through yourself or a spouse
If you meet these requirements, you can deduct the amount you pay for health insurance, however, the deduction cannot exceed the revenue generated from your business (when revenue generated from a business activity exceeds the expenses, costs and taxes involved in sustaining the business).
Here’s an example: Let’s say you make $4,000 from driving for Shipt this year and you had $500 in business expenses. If you pay $3,600 per year for a health insurance plan for you and your family, then you can only deduct $3,500 of that $3,600. (Your AGI – your business expenses).
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2. The Premium Tax Credit (PTC)
PTC is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace. While this isn’t a deduction, these are credits to help make your health insurance plan more affordable. Your tax credit is based on the income estimate and household information you put on your Marketplace application in relation to the federal poverty level.
To get this credit, you must meet all of the following IRS requirements:
- Your household income must fall within a certain range.
- You do not file a tax return using the filing status of Married Filing Separately.
- You cannot be claimed as a dependent by another person.
- You have health insurance coverage through a Health Insurance Marketplace.
- You are not able to get affordable coverage through an eligible employer-sponsored plan that provides minimum value.
- You are not eligible for coverage through a government program, like Medicaid, Medicare, CHIP or TRICARE.
- You pay the share of premiums not covered by advance credit payments.
You have two options for claiming Premium Tax Credit
- Monthly: The government can issue your credit “in advance” to your health insurer to help offset the monthly cost of the coverage.
- Annually: You can choose to receive your credit when filing your taxes which can increase your refund or decrease the amount of taxes you owe.
Be sure to file Form 8962 when you take the premium tax credit. You can attach it to your tax return or include it in when you file your tax return electronically!
3. Deducting Medical Expenses
When filing your taxes, you have either option of using the Standard Deduction or Actual Expense (itemizing your deductions). While the Standard Deduction tends to be easier and less time consuming, itemizing deductions could save you more money come tax time. If you have medical expenses that add up to more than 7.5% of your Adjusted Gross Income (AGI) for the 2020 tax year, you can deduct those expenses on Schedule A.
Be careful—Not all of your medical expenses can be deducted! The expenses cannot have been reimbursed to you, and they have to have been paid in the year of your tax filing.
Below are approved deductible medical expenses:
- Fee and payments to doctors
- Payments for nursing home care or inpatient hospital care
- Treatment at drug or alcohol addiction facilities
- Prescription payments
- Transportation to and from essential medical care
- Health insurance premiums
To sum it up!
Make sure to do the math so you get the best possible solution when it comes to getting a break on your medical expenses. There are many tax opportunities out there. Let us help by downloading Everlance today so we can help you keep track of all your expenses.
Disclaimer: The above is written in general guidance and does not constitute professional tax or legal advice.