Can I deduct my exchange premiums when I file taxes?

Q. I’ve always had employer-sponsored health insurance, and the premiums were paid pre-tax. But I left that job last year, and have now purchased individual health insurance in the exchange. Do I get to deduct the premiums I’ve paid when I file my taxes?

A. If you’re self-employed, yes. If not, it will depend on how much you spend on medical expenses during the year.

When you had employer-sponsored health insurance, your share of the premium was likely payroll deducted on a pre-tax basis, and thus your W2 reflected that fact. You did not have to deduct the premiums when you filed your taxes, because they were not included in the taxable income reported to you on your W2.

Now that you’re buying your own health insurance, there are several things to keep in mind:

• If you’re self-employed, you’re allowed to deduct your health insurance premiums (note that you can only deduct the portion you pay, so if you receive a premium subsidy, you can only deduct the after-subsidy premium).

• If you buy your own health insurance but you’re not self-employed, your premiums are only deductible as part of your overall medical expenses. The IRS allows you to deduct medical expenses that exceed 7.5% of your adjusted gross income, but you have to itemize your deductions to do so (the ACA had changed the threshold to 10%, but the GOP tax bill — H.R.1 — that was enacted in December 2017 returned the threshold to 7.5% for 2017 and 2018, the Further Consolidated Appropriations Act that was enacted in late 2019 extended that lower threshold through 2019 and 2020, and the Consolidated Appropriations Act, 2021 (a major COVID relief package) permanently set the threshold at 7.5% of income). Keep track of all your medical expenses throughout the year, as they can add up quickly. But if your total medical expenses don’t reach 7.5% of your income, you can’t take a deduction — and even if they do, you can only deduct the portion of the total medical expenses that exceeds the limit. Unfortunately, this puts non-self-employed people who buy their own health insurance at a distinct disadvantage compared with people who have employer-sponsored health insurance or who are self-employed. The ACA’s employer mandate only applies to businesses with 50 or more employees, so people who work for small businesses often find themselves having to purchase individual market health insurance. The same is true for seasonal employees and part-time employees who aren’t eligible for their employers’ health plans. Although individual market coverage is their only option, they have to pay their premiums with after-tax dollars. (In many cases, however, they may be eligible for premium subsidies — ie, premium tax credits — to lessen the burden. This is especially true since the American Rescue Plan and Inflation Reduction Act have enhanced subsidies for 2021 through 2025.)

• If you qualify for an income-based premium tax credit to lower your premiums, make sure that you continue to obtain your coverage through the exchange in your state. If you switch to an off-exchange plan, you wouldn’t be eligible for a subsidy to offset the cost of your coverage. If you buy your plan on-exchange and you’re eligible for a premium tax credit, you can either take it up-front, paid directly to your insurer each month (this is what most people do), or you can pay full price for your coverage each month and claim the full premium tax credit when you file your taxes (if you take the tax credit up-front, you’ll reconcile it on your tax return, and the total amount will be adjusted if necessary).

• If you receive a subsidy to offset the cost of your health insurance premiums in the exchange, you cannot “double-dip” at tax time. In that case, if you’re self-employed or if your total medical expenses are high enough to allow for a deduction, you can only deduct the actual portion you paid, not the portion that was paid with the premium tax credit. Note that it can get a bit complicated if your premium deduction reduces your modified adjusted gross income and thus increases the amount of your subsidy … which in turn decreases the amount of your total premiums that you can deduct. The IRS has addressed this circular problem, and the details are here.

Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org.