What to know about health insurance and taxes

Understand when you can — and can’t — deduct health care premiums and medical expenses.
Couple reviewing tax documents together

Health care costs can be significant, but it's possible to find some relief in the tax code. For example, insurance premiums and many medical expenses may be tax deductible, provided they meet certain criteria.  

Working with a tax professional,  we can help you better understand the tax implications of your health care expenses and how managing those costs can help you reach your financial goals.

Here is what to know about health insurance and taxes:  

In this article:

When you can deduct medical expenses

Many medical expenses are deductible, however, to be eligible to claim the deduction, you’ll need to both itemize your taxes and spend a significant portion of your income on health care costs. In addition, you’ll need to have paid these medical expenses out of pocket (after-tax), not through an HSA (pre-tax).

To qualify for the medical deduction, your unreimbursed medical and/or dental expenses need to exceed 7.5% of your adjusted gross income (AGI) for the year — and you can only deduct those expenses that exceed the 7.5%.

Generally, most Americans don’t regularly meet this 7.5% threshold. However, if you’ve had a significant health event, a chronic health condition or a year with unusually high medical needs, it’s worth exploring whether you qualify for this deduction.

Deductible medical expenses include:

  • Preventive care
  • Mental health services
  • Dental and vision insurance premiums
  • Long-term care insurance premiums
  • Travel and lodging for medical appointments in certain circumstances

See the IRS Publication 502 for a list of all medical expenses that qualify.

Keep in mind: To deduct these expenses, it’s about when the medical bill is paid — not when the medical procedure or service was performed. For example, if you undergo surgery at the end of 2024, but don’t pay the bill until the beginning of 2025, those expenses will be eligible for deduction in the 2025 tax year — not 2024.

Advice spotlight

“Bunching” itemizable medical deductions within a single year may yield a bigger tax benefit. While many medical events cannot be planned for ahead of time, certain elective procedures can be. If you’re expecting higher spending on medical expenses, consider timing procedures – and paying the bill – within a single tax year. This strategy, known as “bunching,” may allow you to reap maximum impact by itemizing your deductible expenses in certain years, while in other years, taking the standard deduction.

Learn more: Tax deductions and credits to know

When health insurance premiums are tax deductible

While most individuals aren’t eligible to deduct health insurance premiums from their taxes, there are some circumstances to be aware of if you pay for premiums with after-tax dollars.

  • If you get insurance in the Health Insurance Marketplace: You can deduct the full cost of your health care premiums from your taxable income — even if you don’t itemize your taxes. However, there are two exceptions to this rule:
    • If you can get health coverage through a spouse’s plan but choose to go through the health insurance marketplace instead, you are not allowed to deduct the premiums from your taxable income.
    • If you do qualify for a premium deduction, any discounts or tax credits you receive through the public marketplace reduces the amount you can deduct from your taxes.
  • If you have health insurance through an employer-sponsored plan: While you can’t deduct your monthly premiums, you can deduct out-of-pocket premiums, provided you don’t use an HSA to cover those costs. This applies only if you itemize deductions and if your total medical expenses exceed 7.5% of your adjusted gross income for the year. For most people, the amount they pay for their premiums doesn’t meet that threshold.
  • If you have health insurance through COBRA: Because you pay the premiums for insurance obtained under COBRA out of your own pocket, these health insurance premiums are also tax deductible. As with employer-sponsored insurance, however, you can only claim the deduction if you itemize — and only if your total medical expenses exceed 7.5% of your adjusted gross income for the year. If you use HSA funds to pay for COBRA premiums or expenses, these are also not eligible for a deduction.

Tax benefits of an HSA

HSAs are the only investment vehicle that offers a triple tax advantage: contributions are tax-deductible, growth is tax-deferred and withdrawals are tax-free, if they are used on qualified medical expenses.

Key tax benefits include:

  • Any contributions made by you (or someone other than your employer) are fully deductible from your federal income taxes, even if you don’t itemize your deductions.
  • Any contributions to an HSA made by your employer — including contributions made through a cafeteria plan — will be excluded from your taxable income.
  • The interest or other earnings on the assets in the account are tax-free, as are distributions, provided they go to pay for qualified medical expenses.
  • Because you own your HSA, and because there are no required minimum distributions (RMDs), your account can continue to grow tax free until you choose to spend the funds.

Learn more: The triple tax benefits of an HSA

Navigate the tax impact of health care expenses

We, along with your tax professional, can help you understand the tax implications of your health care spending as part of your overall financial strategy.

Questions to discuss with us

  • How can I bunch medical expenses in a single year for tax purposes?
  • Aside from the tax advantages, what should I consider if switching to a high-deductible health plan with an HSA?
  • How much should I contribute to my HSA if I want to use it for health care expenses in retirement?