Do I Take The Standard Deduction Or Itemize My Expenses
Whether you take the standard deduction or itemize depends on your financial situation. Choosing one or the other is not permanent â you can change every year when you file your taxes. To determine what would work best for you, we suggest looking at the Schedule A . Add up all eligible itemized expenses, including medical, and compare that number with the standard deduction that would apply to you. If your itemized expenses total more than your standard deduction amount, you would save money by taking the time to itemize. You can also use this IRS tool to help you determine what medical expenses are deductible.
Should You Take The Standard Deduction Or Itemized Deduction
There are two main questions to ask when deciding whether to itemize:
Are your medical expenses greater than 7.5% of your AGI? You can only deduct the portion of your medical expenses that exceeds this amount. For example, if your AGI is $100,000 and your medical expenses were $10,000, you could only deduct $2,500 of that amount .
Do your itemized expenses exceed the standard deduction? The standard deduction is a set amount you can deduct from your taxable income to reduce your tax liability. For tax year 2021, the standard deductions are:
- $25,100 for married couples filing jointly
- $12,550 for single taxpayers and married individuals filing separately
- $18,800 for heads of households
Additional deductions are allowed for blind people and those 65 or older. If someone else claims you as a dependent, your standard deduction may be lower.
If your total deductions are higher than the standard deduction, it may make sense to itemize. Medical expense deductions aren’t the only factor to consider. You may also want to itemize deductions if you:
- Paid mortgage interest and property taxes on your home
- Made significant charitable contributions
- Suffered major casualty or theft losses that weren’t insured
What Are The Limits For Deducting Medicare Premiums And Costs
There is no limit as it relates to traditional Medicare on any out -of-pocket cost. However as far as Medicare Advantage plans are concerned, out-of-pocket limits exist but they fluctuate based on the specific Medicare carrier involved.
In most cases, members arent obligated to pay a premium for Part A because theyll have already paid Medicare taxes when employed for at least 40 quarters, which is equivalent to 10 working years.
Aca Tax Credits Mean More Savings For The Self
How else can you lower your health insurance costs when self-employed? The Affordable Care Act introduced premium tax credits , which are refundable credits that help qualifying Americans pay their premiums for health insurance coverage purchased through the Marketplace.
- Not be eligible for affordable coverage through an employer-sponsored plan.
- Not be eligible to enroll in a government plan like Medicare, TRICARE, or Medicaid.
- Have paid your health insurance premiums by the original due date of your tax return.
- Not file your tax return with the status married filing separately.
- Not be a dependent.
- Have household income thats at least 100% and no more than 400% of the federal poverty line for your household size.
To get a PTC, enroll in health insurance coverage through the Marketplace and request financial assistance. The PTC amount you qualify for will be estimated based on your family size, household income, and eligibility for non-Marketplace coverage. Your estimated credit, if you qualify for one, will be paid in advance directly to your insurance company on your behalf, lowering your out-of-pocket monthly expenses.
Health Insurance Premiums And Total Household Resources
Some qualified paid health insurance premiums may be deducted from income when calculating the homestead property tax and other credits allowed on the Michigan income tax return.
Pre-Tax Deduction An amount excluded from income tax. Pre-tax deductions reduce your taxable income. They are deducted from your income before taxes, so you are not taxed on that money.
Post-Tax Deduction An amount deducted after the tax is deducted. Post-tax deductions do not reduce your federal, State and Medicare tax liability. They are deducted from your income after taxes, so you are taxed on that money.
Total Household Resources Total household resources includes all income received by all household members during the year, including income that might be exempt from adjusted gross income. Net losses from business activity may not be used to reduce total household resources. For a listing of income sources to include in total household resources, view Income and Deductible Items .
POST TAX HEALTH INSURANCE PLANS
Post-tax premiums paid for any of the following types of health insurance plans may be deducted to compute applicable credits:
Post-tax Medicare premiums that are paid out of your pocket may be deducted to compute applicable credits. This applies to the following types of coverage:
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Are Medical Insurance Premiums Deductible
An individual can deduct health insurance premiums under the following conditions:
- The premiums were not paid for by an employer.
- The premiums were not paid for with pre-tax dollars .
- A subsidy is not claimed.
- The premiums + medical expenses exceed 10% of the taxpayers adjusted gross income. Adjusted gross income is ones total taxable income, after deductions.
Taxpayers must choose between itemizing their deductions or simply choosing the standard deduction.
Itemized deductions are eligible expenses that decrease ones adjusted gross income. If these expenses are high enough, then it may be to the taxpayers benefit to take the itemized deductions over the standard deduction. Receipts must be kept if one chooses this option.
The standard deduction is a fixed dollar amount, it also reduces ones adjusted gross income. No proof of expenses are expected or required. As such, the taxpayer does not need to hold on to receipts.
A taxpayer cannot claim both itemized and standard deductions. As such, it is recommended every taxpayer calculate the total amount of their itemized deductions when doing up their return, and compare it with the standard deduction to see which results in the bigger tax break.
What Are The Limits And Requirements For Deducting Medicare Premiums And Costs
Medical and dental expenses that cannot be reimbursed, which also encompasses Medicare premiums and copayments, may be allowed as deductions. These deductions are allowed when the Medicare beneficiary itemizes. As a general rule, premiums for Part B and D are deductible for the most part, although premiums for Part A are only deductible under prohibitory circumstances.
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Medical Expense Deductions For The Self
There is an exception made to the 7.5% rule for individuals who run their businesses. Among the many other tax deductions and benefits that self-employed individuals can claim, you’re allowed to deduct all your premium payments from your adjusted gross income, regardless of whether you itemize your deductions. However, you may be precluded from this deduction if you are:
- Eligible to participate in another employer’s plan and elect not to
- Self-employed, but you have another job that offers a health plan
- Eligible to receive coverage through a spouse’s employer-sponsored plan.
There are also limitations imposed on self-employed individuals based on the amount of their business income. In any given year, a self-employed person cannot deduct more than the income they generate through their business operations. Individuals who operate more than one business can designate only one of them as the health insurance plan sponsor you cannot add up the income generated by multiple companies to claim the maximum deduction. In the case of self-employed persons, it may be in their best interest to choose their most profitable business as the plan sponsor to increase their potential amount of tax relief.
What About Medical Expenses
Medical expenses can be deducted if you itemize your deductions on Schedule A . You can deduct medical expenses that add up to more than 7.5% of your adjusted gross income. The expenses can include money you spent to diagnose, cure, mitigate, treat, or prevent disease, as well as payments to treat any function or structure of the body. You can also include payments made for insurance premiums that exceed the amount of net income you earned in a year.
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Expert Insights To Help You Make Smarter Financial Decisions
ValuePenguin has curated an exclusive panel of professionals, spanning various areas of expertise, to help dissect difficult subjects and empower you to make smarter financial decisions. Read on for more health insurance insights.
- Samuel Handwerger
The commentary provided by these industry experts represents their viewpoints and opinions alone. Responses were accurate at the time of publication but for specific instruction about your situation, contact an accountant.
How To Calculate Your Healthcare Deductions
Suppose, for instance, that your adjusted gross income for the year was $50,000. Seven and a half percent of that amount is $3,750, so any qualified expenses exceeding that amount are deductible. If your total medical expenses, including premiums, were $6,000 in total, you’d be able to deduct $2,250 from your taxable income. Make sure you don’t include any reimbursed expenses when doing your calculation, such as premium tax credits. Some individuals are eligible for premium tax credits if they’ve purchased their insurance through the Health Insurance Marketplace, also known as “The Marketplace.”
The Marketplace is a platform for individuals, families, or small businesses to purchase health insurance. It was created as a result of the Affordable Care Act in 2010 to achieve maximum compliance with the mandate that all Americans carry some form of health insurance. If your purchase health insurance through the exchange, you may receive income-based government subsidies that help defray the cost of premiums sold on an exchange. If your estimated income falls between 100% and 400% of the federal poverty level for your household size, you qualify for a premium tax credit, according to the HealthCare.gov website.
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Which Medicare Premiums Are Tax
Medicare Part B Premiums are tax-deductible. Medicare beneficiaries have the option to apply for Part B coverage that covers doctors appointments, lab tests, and more. It isnt required that members have part B Medicare. However, beneficiaries that choose so, are eligible for a bonus when they deduct the Part B premium from their taxes. Medicare part D premiums are also tax-deductible.
Tax-deductible Medicare Advantage Plans
Other Medical Expenses That Are Tax
The IRS lets you deduct medical expenses that were ordered by a doctor or health care professional. For a complete list of acceptable medical expenses, you can visit the IRS.gov website. For the 2021 tax year, you can deduct the cost of personal protective equipment, such as masks, hand sanitizer and sanitizing wipes for the primary purpose of preventing the spread of the coronavirus.
Other eligible medical expenses include:
- Eye exams, eyeglasses and contact lenses
- Guide dog or other service animal
- Hearing aids
Along with these direct medical expenses, you can deduct travel costs related to medical care. For example, for a drive to a physical therapy appointment, you could deduct the cost of gas and oil as a medical expense.
How Much Does Health Insurance Cost If Youre Self
The cost of your health insurance depends on a variety of factors, including the premium tax credits you qualify for and the plan you want. Within the Marketplace, youll be able to browse different categories of plans with varying costs for premiums, deductibles, copays, and coinsurance. You can apply online to learn more about the potential costs for your specific situation.
Lower Your Health Care Costs
Itemizing medical expenses is just one way to lower your health care costs. Your employer may offer a Flexible Spending Account , or you may be able to set up a Health Savings Account both provide tax advantages to reduce the cost of health care.
If you pay any health insurance premiums out of pocket, know that a late or missed payment can negatively affect your . Consider setting up automatic payments to ensure that both you and your credit stay in good health.
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Standard Vs Itemized Deductions
When you’re filing your taxes, you have the option to either itemize your deductions, where you catalog every deduction you qualify for , or take the “standard deduction” â a set dollar amount based on your family status. For the 2021 tax year, the standard deduction for single people or married people filing separately is $12,550. The 2021 deduction for a married couple filing jointly is $25,100, and if you’re filing as head of household, your standard deduction is $18,800.
You should always pick the option that reduces your adjusted gross income the most, and about 90% of taxpayers choose the standard deduction.
Unless you are self-employed, you can only deduct the cost of health insurance from your income if you itemize your deductions.
For example, if you are single with an AGI of $70,000 and take the standard deduction of $12,550, you’re lowering your taxable income to $57,450.
Additionally, in order to deduct medical expenses, including health insurance, from your taxes, your total medical expenses must exceed 7.5% of your AGI â and you can only deduct the amount above that 7.5%. For example, if your AGI is $100,000 and your medical expenses total $9,500, you’d be able to deduct $2,000 of medical expenses.
How much is the standard deduction?
The amount of money included in the standard deduction depends on the size of your family. For the 2021 tax year, the standard deduction amounts are:
|Single and married filing separately||$12,550|
Tax Deductions For Pre
There are a lot of advantages to having your premium deducted on a pre-tax basis from your paycheck. If your employer sets up a Premium Only Plan , or Cafeteria Plan, your insurance premium contributions can be deducted from your payroll on a pre-tax basis. This plan can save you up to 40% on income taxes and payroll taxes. Also, pre-tax medical premiums are excluded from federal income tax, Social Security tax, Medicare tax and typically state and local income tax.
You can also reduce the amount of taxes that you owe with exclusions, deductions, or credits. These three subsidies are slightly different in nature but all boast big advantages. Essentially, deductions and exemptions both reduce your taxable income, while credits reduce your tax.
Learn more about exclusions, deductions, and credits in our article
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Understanding Standard Or Itemized Deductions
If you find that your health insurance premiums and medical expenses do exceed 7.5% of your AGI, youll then need to decide whether to file your deduction as standard or itemized. The standard deduction is a set amount (for example, $25,100, but if your itemized deductions exceed that amount, then youll want to itemize them.
What If I Am Self
As a self-employed individual, you are in a unique situation. If your business has employees and you happen to be providing them with a health plan , then you can claim the premiums as long as they are considered to be a reasonable business expense. Your employees, on the other hand, cannot.If you do not have any employees, you may be eligible to deduct premiums that you pay for medical and dental insurance coverage for yourself, your spouse, and your dependents. Refer to the CRA website for more details.
How Much Of Health Insurance Is Tax Deductible
If you buy an individual or family health insurance plan,either on the open market or through a marketplace,and you pay all of the cost out of pocket,then the whole amount is deductible. Your total medical expenses,including premiums,must surpass 7.5 percentof your adjusted gross income to be deductible.
Who Qualifies For Medical Expense Tax Deductions
The Internal Revenue has two critical eligibility rules for people who dont own a business:
- A standard deduction is $12,400 for singles, $18,650 for heads of household and $24,800 for married joint filers for the 2020 tax return. If your tax deductible health insurance costs dont exceed those limits, its best to go with a standard deduction rather than itemize your health care deductions.
- Your health care costs must exceed 7.5% of your adjusted gross income for 2020 tax filings. The AGI is what you earn in wages, investments and other sources minus things like alimony and student loan interest. You can find your adjusted gross income on line 37 of Form 1040. Note: starting with 2021 taxes, medical costs will have to exceed 10% of your AGI.
So, the first question to answer is: How many eligible health care costs do you have? If your health care costs are less than the standard deduction amount, you should take the standard deduction instead.
Chris Peterson, tax manager at CB Smith & Associates, said most people take the standard deduction rather than itemize health care deductions because they dont exceed the standard deduction level.
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