Leveraging Health Insurance Deductibles for Tax Benefit

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Leveraging Health Insurance Deductibles for Tax Benefit

Oct, 25th 2016

As Barack Obama readies to leave the White House and as open enrollment for his 2017 ACA healthcare plans get ready for their close-up, his signature legislation is facing heavy criticism for its failure to give consumers greater choice, cut medical premiums and prescription drug costs or lower plan deductibles.

Most people who apply for Obamacare are eligible for federal subsidies that makes the insurance more affordable. In the insurance business, however, the more affordable something is upfront, the less affordable it is when you actually use it. Insurance companies in all industries are about one thing and one thing only, mitigating their exposure to risk and cost. That’s how they make money. How do they do this? The simplest most universal way is by raising deductibles on your policy. As a consumer with low monthly premium insurance, you are then responsible not only for the monthly premium but for the first many thousands of dollars of cost in a given year before the insurance really kicks in. This can be most costly to individuals with serious medical needs.

For those people who pay higher deductibles there is still a way to mitigate some of your exposure to the serious cost of untimely illness or extreme medical service needs. And as so often is the case when dealing with the federal government, the cost savings comes through our tax system.

The federal government allows taxpayers to write-off medical costs over and above 10% of their adjusted gross income (AGI). And guess what? Your insurance premiums, which in most cases are already subsidized through the ACA, may count in the figuring of your past year’s medical costs for potential tax savings. Now a few things to keep in mind before putting your nose to the proverbial grindstone to figure if you’re going to meet the 10% AGI threshold:

  • The IRS does not let you add just any medical bill when figuring the total cost of your care for the taxable year. To find out what they do accept as legitimate medical costs, have a look at the IRS’s Publication 502. Don’t worry, it’s a pretty long list.
  • You will need documentation on everything you paid for that is eligible for a potential tax write-off. This is easier now than ever through your health insurance provider’s web site or by calling them to request claims documentation for the year. Don’t forget to ask for a copy of your 1095A form documenting the total amount you paid in premiums that year.
  • This is a tax write-off and not a tax rebate, therefore the savings you receive is a function of the tax bracket you’re in as well as the total you surpass the 10% AGI threshold with your medical bills.
  • You will have to fill out a “Schedule C” income tax form as you will be itemizing write-offs and not taking the standard deduction through a simple 1040 individual or joint tax form.

Depending on your income and your costs, you can use the high deductibles in your insurance plan to save money on your federal income taxes.

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