How to take advantage of health insurance expenses
As you’re preparing for tax season, all that ails you could actually work in your favor.
“Don’t overlook health insurance expenses when preparing your 2010 federal taxes, or you might leave money on the table,” says Keith Mendonsa, consumer specialist with www.eHealthInsurance.com. “Self-employed people, people who were on COBRA, and people who bought their own health insurance plan may be able to deduct a portion of their expenses and get a bigger tax fund,” he adds.
Here’s what you need to know.
In addition to the standard, “above the line,” deduction, self-employed persons can also deduct the cost of their health insurance premiums from their self-employment taxes on Schedule SE. “This is a one-time-only opportunity available for 2010 taxes, so if you’re self-employed be sure to take advantage of it,” says Mendonsa, who offers several tips.
Deduct health insurance premiums as a business expense
If you had self-employment income in 2010, you may also be able to deduct health insurance premiums you paid for yourself and your dependents as an “above the line” business expense (that is, without itemizing) on your federal tax return. Be aware, however, that you may not deduct premiums paid for any month in which you were eligible to participate in an employer-sponsored health insurance plan, and that the amount you deduct cannot be greater than your net self-employment income for the year. Know too, that you may not be able to include what you paid toward your monthly premiums as an “above the line” expense and itemize it. Talk to a tax professional to learn more about the different types of self-employment status and the tax implications of each in your state.
Itemize your health insurance and medical expenses
Even if you’re not self-employed, if you itemize on your federal tax return you may be able to deduct medical expenses from your taxable income. According to IRS Publication 502, qualifying medical expenses include monthly premiums you pay for coverage, including some Medicare premiums, copayments, deductibles, dental expenses, and costs for some services not covered by your insurance plan. Keep in mind, you can only deduct the portion of your medical expenses that exceeds 7.5 percent of your adjusted gross income. That means this deduction won’t be for everyone, but if you, or one of your dependents were seriously ill or hospitalized last year, or if you paid COBRA premiums (without receiving federal subsidy), you may qualify.
Maximize your refund with your Health Savings Account
An HSA is a tax-advantaged savings account used in conjunction with an HSA-eligible health insurance plan. Account contributions, qualified distributions and earnings are all tax-exempt. An HSA allows you to deposit a portion of your pre-tax income into a savings account and use those funds to pay for qualified medical expenses. Unused money can be invested and accure from year to year, says Mendonsa. If you have an HSA, be sure to deduct your contributions up to federally prescribed limits. Contributions to your HSA designated for 2010 and made before April 18, 2011 can be counted toward your 2010 federal taxes. According to IRS Publication 969, HSA contributions for the 2010 tax year are capped at $3,050 for individuals and $6,150 for families.
Know that the COBRA subsidy may alter your taxable income
If you enrolled in COBRA as a result of a layoff after June 1, 2010, you are no longer qualified for the 65 percent federal COBRA subsidy, but plenty of people who did qualify for the subsidy were still receiving it in 2010. If you received the COBRA subsidy, your taxable income may increase, depending on how much money you made last year. If your adjusted gross was between $125,000 and $145,000 ($250,000-$290,000) for those filing joint returns, you are not eligible for the subsidy and should review your tax liability for the subsidy carefully.
As always, check with your tax professional for more information about what may or may not apply to you.
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