Guide to Tax Deductions Related to Insurance - SmartAsset

Claiming tax deductions you’re eligible for is an effective way to reduce your tax burden. But identifying all the deductions available to you can be challenging and you can’t claim deductions if you don’t know they exist. You may be surprised to find out that certain costs related to your insurance and healthcare may actually lower your tax bill. In some instances, you might be able to deduct your insurance premiums, medical expenses and other health-related costs on your taxes. Here’s what to know about potential deductions, when they apply and how much they can reduce your tax bill. You can also work with a financial advisor to help you plan out all of your tax options to find the right strategy for your situation.

HSA Contributions

Health savings accounts (HSAs) are available to those with high-deductible healthcare coverage, either for themselves or their families. While an HSA is not technically an insurance product, your contributions can be used to supplement your health insurance and reduce your medical costs. For instance, you can withdraw HSA funds tax-free to pay for your healthcare premiums and other qualifying medical expenses, provided your plan allows it.

HSA contributions are also tax-deductible, so contributing regularly could result in a welcomed break at tax time. For 2023, HSA limits are $3,850 for individual coverage and $7,750 for family coverage. Contributing up to the limit results in a fairly sizeable tax deduction and you do not need to itemize deductions on form 1040 to qualify.

Qualifying Medical and Dental Expenses

Per the IRS, you can also claim a deduction if you itemize deductions and your qualifying medical and dental expenses exceed 7.5% of your adjusted gross income for the year. Keep in mind you can only deduct the portion of your expenses that exceed 7.5% of your AGI, not all of your medical costs. For instance, if you spent $6,000 on healthcare in a given year and your AGI was $60,000, you could deduct $1,500 on your taxes—not the full $6,000.

While you’d likely need to spend a fairly sizeable amount on health care to be eligible for this deduction, doing so may be possible if you or a family member is battling a serious health issue and spending a significant amount on treatment and care.

Healthcare Premiums

Generally, with an employer-sponsored health plan, your company subsidizes a portion of your insurance premiums. Employer-paid premiums and any pretax premiums that come out of your paycheck aren’t tax-deductible. While you might not qualify for a tax deduction with an employer-sponsored health plan, you could qualify if you’re paying out-of-pocket for healthcare premiums.

If you’ve purchased coverage through a marketplace, or COBRA or pay for Medicare Part B, C or D, your premiums may be tax-deductible if you’re itemizing deductions. But only the portion that exceeds the threshold of 7.5% of your AGI the IRS has set. Premiums for Medicare Part A are not tax-deductible.

Car Insurance Premiums

If you meet certain criteria, you may also be able to deduct your auto insurance premiums on your taxes. You’d need to use your car for business purposes, not including commuting to work and separate any personal use from business use. Here are some instances where you could deduct your car insurance premiums:

You’re in the army reserve and regularly travel within 100 miles for business.
You’re a rideshare driver who spends a portion of your driving time bringing clients from point A to point B.
You’re an independent salesperson who drives to meet with clients regularly.

In addition to your car insurance premiums, you may also be able to deduct the cost of gas, oil, repairs, depreciation and other expenses.

The Bottom Line

While it would be a nice perk if all our insurance premiums were tax-deductible, it’s simply not the case. But in some instances, you can deduct a portion of your health or auto insurance premiums, as well as other qualifying medical or health-related costs. Doing so could help reduce your tax burden and keep more cash in your pocket.

If you’re wondering whether or not you can deduct insurance-related costs on your taxes, consider speaking with a tax professional to learn about your options. They’ll be able to advise you on which deductions you can and cannot claim, insurance-related or otherwise.

Tips for Tax Planning

Whether you need a full tax plan or just to figure out what deductions and credits might apply to you, a financial advisor can help. They are experienced at providing a full offering of financial services to their clients. If you don’t have a financial advisor, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re not ready to get help with your taxes, consider taking a look at our resource on properly preparing for your tax strategy.