Is the Money I Paid for My Children's Health Insurance Tax-Deductible?

Premiums are deductible, but there are a few catches.

Premiums are deductible, but there are a few catches.

Health insurance premiums can be a staggering monthly expense for most couples when their employers don't cover them as a job perk. Even if your employer does offer a plan, it may not extend to your children as well. Premiums you must pay for you, your spouse, or your dependents are deductible, but only to an extent.

IRS Rules

Your family's medical expenses are deductible, including insurance premiums, but they must add up to 10 percent or more of your adjusted gross income beginning in the 2013 tax year. For the 2012 tax year, the threshold is 7.5 percent. Your deduction is limited to what you spend in excess of this amount. For example, if 10 percent of your AGI is $6,000, and if all your medical expenses for the year add up to $6,500, your deduction is only $500.

Non-Deductible Portions

As with almost everything with the IRS, your children's premiums are subject to a few qualifying rules. You can only include unreimbursed costs when you're tallying your total. For example, if you take your child to the doctor and the bill is $110, and if your insurance pays $90 of that but you have a $20 co-pay, only the co-pay counts toward your deduction. If your employer contributes anything to your health insurance plan, you can't deduct that portion of the premiums unless it's charged to you as income on your W-2. You can't deduct the costs of anything you buy over-the-counter, or certain elective remedies such as smoking cessation helpers or cosmetic procedures.

How to Deduct

If all your medical costs, including your children's health insurance premiums, add up to more than the required percentage of your AGI, you must itemize on your taxes to claim the deduction. This involves filing Schedule A with your 1040 tax return, and you can itemize other deductions on this form as well, such as some costs related to owning your home. Don't grab the opportunity without doing a little math first, however. Itemizing might not be in your best interest tax-wise.

Your Other Option

If you itemize your deductions, it bars you from claiming the standard deduction for your filing status. It's an either/or situation; you can't do both. For example, if you're married and you and your spouse file a joint married return, the IRS allows you to claim a $11,900 standard deduction as of the 2012 tax year. If all your itemized deductions, including your medical costs and health insurance premiums, only add up to $11,000, you'd end up paying more in taxes by claiming your insurance premiums. Deductions subtract from the amount of income you pay taxes on, so if you itemized in this case, you'd pay income tax on $900 more.

Self-Employment

If you're self-employed, the IRS is particularly kind to you when it comes to health insurance. You don't have to choose between itemizing and the standard deduction. The cost of insurance premiums for you and your family comes off the first page of your 1040 tax return, on Line 29. It has the same effect of reducing your taxable income, but there's no 7.5 or 10 percent AGI limit. However, you're only eligible for this deduction if you and your family cannot possibly be covered by any other plan, such as your spouse's if she is employed.

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