Keith Mendonsa, a tax expert from eHealthInsurance.com, shared the following four ways to reduce your taxes with health-related expenses. Consult an accountant or certified tax professional for more information about how these four tax deductions apply to you.
- Health tax deductions: A new deduction this year and only this year let’s self-employed persons deduct the cost of their health insurance premiums from their self-employment taxes on Schedule SE.
- Got self-employment income? “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,” Mendonsa said in an email. You cannot deduct premiums paid during any month in which you could have used employer-sponsored health insurance. Plus, the amount you deduct cannot be greater than your net self-employment income for the year. “Also, keep in mind that you may not be able to include what you paid toward your monthly premiums as an “˜above the line’ expense AND itemize it as described in the next tip. 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: If you itemize your federal return, you may be able to deduct medical expenses. Check out IRS Publication 502, which lists these qualifying medical expenses: co-payments, 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% of your adjusted gross income,” Mendonsa wrote.
- Get an HSA: A Health Savings Account (HSA) holds pre-tax dollars you can use to cover certain medical expenses in conjunction with your HSA-eligible health insurance plan. “If you have an HSA,” Mendonsa wrote, “be sure to deduct your contributions up to federally prescribed limits.” Make a contribution before Apr. 18, 2011 and it can count toward your 2010 federal taxes. HSA contributions for the 2010 tax year are capped at $3,050 for individuals and $6,150 for families.
Also, check if your company has a “cafeteria plan 125”. You estimate how much your medical costs will be for the year and divide that by the number of paychecks in a year. Payroll will deduct it from your check and you are taxed at the new lower check amount. Once you pay for any medical expenses, turn in the receipts and the payroll office will reimburse you. So it also acts like a forced savings account.
Beware of the FSA plans! Unless you are very organized with your paperwork and can submit endless documentation for charges (especially if you use their Benny card) it is a royal pain. AND, if you do not use up all of the money it will go to your company and you lose it.
NOT worth the tax deduction if that happens. Also, rules have changed on what they will pay for. So BEWARE and be careful if you sign up for an FSA
I agree with Cathy’s comment. We signed up for an FSA, and so far, the most frustrating part is that the IRS apparently requires documentation for over-the-counter meds (like antacids, vitamins) that my husband and I use on a regular basis. This documentation? A prescription from our doc(s) for OTC meds. My gyno was nice enough to give me a script for my vitamins without a separate appt, but my husband’s doc refused to write one for his Pepcid — which the doc himself told my husband to take daily! — until my husband came in for an office visit. So yes, tax break on one hand…but a lot more work on the patient’s part, and I’ll be ticked off if we don’t use up all of the money we guesstimated we’d use, because as Cathy points out, it doesn’t roll into the next year.
We like our FSA, and especially the Benny Mastercard. We use it to pay the 10% coinsurance on all our bills and prescriptions and new glasses. I have not been keeping the paperwork – but I guess it’s all on the EOBs which are online, if they ask. Ours is through Horizon Blue Cross Blue Shield, and they seem terribly disorganized, but as long as the Benny card works. We use up our FSA every year about middle of the year, so I’m not afraid of money left over.
I agree with @Cathy and @Jeannine that FSA plans are very complicated. Sometimes it seems like they are set up to frustrate you and foil you from actually saving money.
However, if you know how to work the system, they can pay off.