Private health insurance is health coverage from any private company, whether purchased as an individual policy or through a group health plan. Unlike public health insurance offerings available to qualifying individuals and families through the federal government, some private health insurance plan premiums and expenses are tax deductible.
If you are enrolled in an employer's "cafeteria" health insurance plan, your employers can deduct your monthly premiums from your gross wages or salary prior to withholding federal and state taxes. The result is lower taxable income and greater take-home pay each pay period. This also allows you to pay your monthly health insurance premiums tax-free without having to wait for your yearly tax return to receive the tax benefits.
Private health insurance purchased by individuals is not federally tax deductible. If you opt to purchase your own health insurance policy instead of your employer's group plan, you cannot deduct the premium expenses on your federal income tax. You can, however, deduct all yearly health care expenses including your health premiums, prescription drugs, hospital and doctor visits, diagnostic testing, dental expenses and other medical bills if they total more than 7.5 per cent of your adjusted gross income. However, you can only deduct the amount that exceeds the 7.5 per cent income threshold.
If you purchase an individual private health insurance policy for yourself or your family due to a lack of access to an employer option, you may be able to deduct both your health and dental insurance premiums on your federal taxes. This exception is only available to self-employed individuals participating in a sole proprietorship, partnership or limited liability company. If you qualify, you can use the deduction for your own premiums, as well as the premiums of your spouse and dependents. As a general rule, your self-employment health insurance deduction cannot exceed the amount of income reported for your business.
Health Savings Accounts
As of January 1, 2004, health savings accounts, or HSAs, provide a tax shelter for all private health insurance policyholders with a qualifying plan. In order to open a health savings account, you must participate in a high-deductible health plan that meets IRS guidelines in Publication 969. Eligibility guidelines are subject to change, but for 2010, the HSA minimum annual deductible for a family plan was £1,560. You can contribute to a health savings account tax-free, but must use the account funds to pay for qualifying medical expenses or else face taxes and a penalty.