Taxes are not only about skills; you also need to focus on what you don’t know. Unfortunately, many taxpayers are unaware of deductions and credits and hence miss out on them. Health and medical costs, as well as insurance premiums, are among the most commonly missed deductions. Many deductions were removed by the 2017 Tax Cuts and Jobs Act (TCJA), although most of the ones described below were not.
The most prevalent form of a premium that gets ignored as a tax deduction is disability insurance. If you’re disabled and unable to work, this form of insurance can help you supplement your income. However, the deductibility of these premiums is complex and restricted.
The Internal Revenue Service (IRS) has done an amazing job by introducing a simple procedure for self-employed taxpayers to deduct overhead insurance, which compensates for company overhead expenditures incurred when you are disabled due to an injury or illness for a long period of time. Premiums for coverage that covers lost wages due to sickness or disability, however, are not deductible.
A Health Savings Account (HSA), which combines a tax-advantaged savings aspect with a high-deductible health insurance policy, is another insurance-related tax benefit that consumers without access to standard group health care should be aware of.
Even if you don’t itemize on Schedule C, all HSA payments are tax-deductible up to the maximum allowed by law. If you have a single coverage plan, you may contribute up to $3,650 (against $3,600 in 2021), and if you have a family plan, you can contribute up to $7,300 (versus $7,200 in 2021), with an extra $1,000 contribution permitted for taxpayers over 55.
Medical costs are deductible up to a specified percentage of a taxpayer’s adjusted gross income (AGI). Due to varied regulations, that percentage fluctuates (most recently ranging from 7.5 to 10%), but it is usually high enough to prevent most individuals from qualifying. For the 2020 and 2021 tax years, the proportion is 7.5 percent of your AGI.
If you have a lot of medical bills to pay, you can increase your deduction by scheduling additional medical procedures or costs in the same year. One caveat: if your insurance provider sends you a reimbursement check the next year, you’ll have to disclose the amount of the deduction that was refunded as income the following year.
Business-related insurance premiums, such as health and dental insurance premiums, as well as long-term care premiums, can be deducted by self-employed taxpayers and other business organizations. If the taxpayer chooses to report real expenditures rather than the usual mileage rate, vehicle insurance can also be deducted.
412(e)(3) plans, for example, are another form of retirement savings vehicle that may be funded with tax-deductible premiums. Small-business owners who want to catch up on their retirement savings and obtain a guaranteed income stream in the future can take advantage of these defined-benefit plans, which can give significant tax benefits.