Your COBRA premiums might be tax-deductible as a medical expense, depending on how much money you earn and how many medical expenses you had for the year. Medical expenses are deductible if they amount to more than 7.5 percent of your annual gross, or pretax, income for 2017 and 2018 taxes. This IRS rule also covers medical expenses under private and employer-sponsored health plans. But because COBRA payments are often higher than traditional employer-sponsored insurance, you're more likely to hit the 7.5 percent threshold if you have COBRA benefits.
Is COBRA Medical Insurance Tax Deductible?
The IRS defines medical expenses as the cost of diagnosing, curing, treating, preventing and alleviating a disease affecting any body part or function. Payments must cover legal procedures by physicians, dentists, surgeons and other health care providers. The cost of supplies, equipment and diagnostic devices also are deductible. Medical expenses include your COBRA premiums and payments for long-term care, mental health treatment and transportation to and from health care facilities. You must take medical tax deductions for the year in which you paid for services, though you also can claim deductions for previous years in which you qualified for deductions you didn't take. Medical expenses also include payments you made for your spouse or dependent child's health care. Medical expenses are reported on Schedule A of the 1040 income tax form.
The Consolidated Omnibus Budget Reconciliation Act, or COBRA, let's say you and your family continue receiving health care benefits under your employer's plan for up to 18 months, or more when changes in your work situation leave you without medical coverage. COBRA benefits must be identical to the employer's plan. Although COBRA is group-rated coverage, premiums are going to be higher than those you paid as a full-time worker. That's because you and your employer shared premium costs. Under COBRA, you pay the entire cost, but less than you would for private insurance. COBRA affects employers with 20 or more workers, 50 percent of whom must be in the employer's health care plan. If you qualify for COBRA, your employer notifies you in writing that you can choose to continue coverage. You have 60 days after receiving the notice to accept or reject COBRA, and 45 days from the date you sign on to pay the first premium. Failure to pay automatically cancels your coverage. COBRA premiums can't be more than 102 percent of the cost of your previous coverage.
You, your spouse and dependent natural-born or adopted children qualify for COBRA under certain conditions. A change in your employment status, known as a "qualifying event," determines your eligibility. You're eligible if you left voluntarily, were laid off or fired, except for misconduct. You're also eligible if your employer cut back your hours. Your spouse is covered under the same conditions as well as if you become qualified for Medicare, legally divorced or separated, or if you die. Your children are eligible under some of these conditions, too.
Exceptions and Changes Ahead
If you get a new job that offers you health insurance, or you become eligible for Medicare, you will no longer be eligible for COBRA deductions. Your coverage also ends. You must notify -- in writing -- the plan administrator of your COBRA benefits that you're no longer eligible. The rule applies even if you don't enroll in another plan. If you continue receiving COBRA benefits while ineligible, the plan administrator charges you the full COBRA premium, rather than the discounted group price you've been paying. Also, the IRS charges you 110 percent of the COBRA premium for keeping and not reporting the coverage.
The 7.5 percent medical expense deduction threshold is expected to increase after the 2018 tax year. For 2019, the threshold is expected to rise to 10 percent. That means you will only be able to write off medical care expenses that exceed 10 percent of your income.
For Your 2018 Taxes
You can deduct any medical expenses that exceed 7.5 percent of your gross income. That includes COBRA fees that you are paying out of pocket. If your employer is still subsidizing your health insurance costs, that's when you can't deduct COBRA costs. The list of any medical expense deduction for 2018 includes out of pocket fees to doctors, dentists, chiropractors, psychiatrists, psychologists and other medical professionals not covered by other health insurance or Medicare. Things like gym memberships, over the counter medicines and toothpaste are not eligible medical expenses. You must itemize, however, to take the deduction. In 2018, the standard deduction doubles, so fewer people will itemize. Costly medical expenses, however, may make it advantageous for you to itemize. To get the right IRS forms for deducting your COBRA payments and other medical expenses, go here.
For Your 2017 Taxes
All residents, no matter your age, can use the 7.5 percent threshold for 2017 taxes. Again, you must be paying your COBRA fees yourself in order to include the money as deductible medical expenses, but because COBRA fees are typically higher, you may reach that 7.5 percent gross income threshold. Also for 2017, you may be more likely to itemize, because the standard deduction is $6,350 for individuals and $12,700 for couples filing jointly. Again, to access the forms and instructions, go here.
Valerie Bolden-Barrett is a writer, editor and communication consultant specializing in best business practices, public policy, personal finance and career development. She is a former senior editor of national business publications covering management and finance, employment law, human resources, career development, and workplace issues and trends.