Are health insurance premiums tax deductible in california

Eligibility

Who's eligible: Employees with Full, Mid-Level and Core benefits

Who’s covered: You

Who pays: There are no costs. The plan is an employee benefit that permits you to pay your share of group health plan premiums with pretax dollars.

How the plan works

• If you enroll in a medical plan that requires you to pay a premium, you’ll be automatically enrolled in TIP. Your premium is deducted from your paycheck each month before taxes are calculated. This reduces your taxable income and increases your take-home pay.
• Premiums for the following family members who are on your UC medical plan are also paid pretax via TIP: Your spouse, children and stepchildren. You may also pay via TIP for other eligible children if they are your tax dependents (grandchildren, step-grandchildren, disabled children age 26 and older and legal wards).
• If you’re in a registered domestic partnership, the premiums for your domestic partner and/or your partner’s children or grandchildren must generally be paid on an after-tax basis for federal tax purposes—unless these family members are your dependents as defined under the Internal Revenue Code.
• However, medical premiums for your registered domestic partner and his or her children (including overage disabled children) may be paid pretax for California tax purposes. Premiums for your registered domestic partner’s grandchildren also may be paid pretax on your California taxes, if the grandchildren are your California tax dependents. 
• If you enroll for benefits through UCPath, you indicated during the enrollment process whether your enrolled family members (including your domestic partner and/or partner’s children or grandchildren) are your tax dependents, and whether your partnership is registered with the State of California. If you enroll for benefits through AYS Online, you’ll need to submit the UPAY 850 form indicating that your domestic partnership is registered with the state.
• If you haven’t registered your domestic partnership, you will pay medical premiums on an after-tax basis for both federal and state tax purposes for your partner and his or her children/grandchildren, unless they are your tax dependents.
• Because TIP reduces your taxable earnings, it may also reduce the earnings on which your Social Security and unemployment benefits are based. If you have questions, check with a tax adviser about your situation. TIP deductions don’t affect the wages used to calculate your UC Retirement Plan (UCRP) benefits or the annual contribution limits for your 403(b) and 457(b) Plan.

Making changes

• Your TIP amount will adjust or stop automatically if you change or cancel your medical plan during your first 31 days of employment or during Open Enrollment. Also, certain changes in your coverage, employment or family status trigger a new 31-day period during which you’re allowed to make certain changes to your medical plan. (This period is referred to as a period of initial eligibility, or PIE. See the Enrollment section of A Complete Guide to UC Health and Welfare Benefits for details on permitted changes.) Once you’ve made the changes, your TIP amount will be adjusted accordingly. If any excess tax has been withheld, you can get it back when you file your tax returns.
• If you enroll in medical coverage midyear without a PIE, you will be subject to a 90-day waiting period and your premium must be paid on a post-tax basis for the remainder of the year. See page 19 of A Complete Guide to UC Health and Welfare Benefits for details.
• If you would prefer not to pay for your coverage on a pretax basis, you may cancel during your first 31 days of eligibility, during Open Enrollment in November, or within the first 31 days after you have an eligible change in employment or family status. The cancellation takes effect as soon as you complete the transaction, subject to payroll deadlines. Your take-home pay won’t be adjusted retroactively.
• If you go on a leave without pay or lose eligibility for benefits due to a reduction in your appointment rate, your participation in TIP automatically ends.

When tax time rolls around, you may be wondering if your health insurance premiums are tax-deductible. The answer? Maybe, depending on various factors, including how you get your coverage, whether you're self-employed, and how much you spend on medical costs, including your health insurance premiums.

This article will explain how tax deductibility works for health insurance premiums, including how the rules differ depending on whether you're self-employed and how much you spend on medical costs.

Employer-Sponsored Health Insurance

Most Americans under the age of 65 get their health insurance from an employer. Employers pay a portion of the premium (in most cases, the large majority of it), and employees pay the rest. And in almost all cases, the premiums that people pay for their employer-sponsored coverage are payroll deducted pre-tax.

Since there's no "double-dipping" allowed, you can't deduct your health insurance premiums on your tax return if they were already paid with pre-tax money throughout the year (ie, deducted from your paycheck before your tax withholdings are calculated). Since most non-retired Americans are paying their health insurance premiums with pre-tax dollars throughout the year, they aren't also taking a tax deduction for those premiums when they file their tax returns.

But for people who buy their own health insurance, it's a little more complicated.

Self-employed

If you are self-employed, the health insurance premiums you pay to cover yourself and your dependents are probably tax-deductible, as long as you're obtaining your own health insurance and aren't eligible to participate in a health plan that's subsidized by your spouse's employer (or your own employer, if you have another job in addition to your self-employment).

This is true regardless of whether you get your insurance through the exchange in your state, or in the individual market outside the exchange. Premium subsidies (premium tax credits) are available in the exchange, but not outside the exchange.

Either way, self-employed individuals can only deduct the amount they actually pay in premiums. As always, there's no "double-dipping" allowed, so if you receive a premium subsidy in the exchange to cover a portion of your premium, you can only deduct your after-subsidy premium on your tax return.

It's important to understand that the amount of premium subsidy you receive is related to your modified adjusted gross income (an ACA-specific calculation, which differs from normal modified adjusted gross income), but the premiums you pay for health insurance as a self-employed person are a factor in determining your modified adjusted gross income. This ends up being a circular problem: Your premium subsidy depends on your adjusted income, but your adjusted income depends on your premium subsidy. The IRS has addressed this issue, and your tax adviser or tax software can help you sort it out.

Even if you're self-employed, if you, your spouse, or your dependents are covered by an employer's group health insurance plan (either your own, from a separate job, or your spouse's or parent's plan), the premiums you pay for that coverage are probably not something you can deduct on your tax return. That's because they're most likely already being paid with pre-tax dollars since employer-sponsored health insurance is tax-deductible for both employers and employees.

And the IRS clarifies in Publication 535 that even if you buy your own health insurance and are self-employed, you can't deduct the premiums if you're eligible to have coverage that's subsidized by an employer, including your own or your spouse's. That's true even if you declined that coverage and bought your own plan instead.

Health Savings Accounts

If you have an HSA-qualified high deductible health plan (HDHP), you may contribute to a health savings account (HSA). Your HSA may be established through your employer, or it may be something that you set up on your own, as you can have an HDHP offered by an employer or purchased in the individual market.

The contribution you make to your HSA is 100% tax-deductible up to a limit (in 2022) of $3,650 if your HDHP covers just yourself, or $7,300 if it also covers at least one additional family member. 2022 contributions to an HSA can be made until the April 15, 2023 tax filing deadline for 2022 returns.

If you have an HDHP in 2023, the HSA contribution limit for 2023 is $3,850 if your HDHP covers just yourself, and $7,750 if it also covers at least one additional family member.

Contributions to your HSA can be made by you or by your employer, but only the portion you contribute yourself is tax-deductible. If you fund your HSA through payroll deduction, the contributions will be made on a pre-tax basis, and that will be reflected in the W-2 you receive (i.e., you won't have to deduct them on your tax return, as they will have already been deducted from your taxable income, similar to the way employer-sponsored health insurance premiums are almost always paid with pre-tax money).

But if you fund your own HSA, you'll keep track of the contributions you make during the year and deduct the total on your tax return (your HSA administrator will also keep track of the amount and will report it to you and the IRS using Form 5498-SA).

The premiums that you pay for your HDHP can also be deducted, just like any other health insurance premium, if you're self-employed. Or, as described in the next section, as part of your overall medical expenses if you itemize your deductions and your medical expenses are high enough to qualify for the deduction.

If you obtain your HDHP via your employer, the premiums are most likely already being paid on a pre-tax basis. In that case, just as with any other type of health insurance, you can't deduct the premiums on your tax return, since the money you used to pay them wasn't taxed in the first place.

So if you're enrolled in an HDHP through your employer and you're making contributions to your HSA via payroll deduction (which is how this works for most people), you likely won't take deductions for either one on your tax return, since the premiums and contributions are probably subtracted from your paycheck on a pre-tax basis.

Premiums as part of overall medical expenses

Even if you are not self-employed, the Internal Revenue Service (IRS) allows you to count medical and dental insurance premiums (and with some limitations, long-term care insurance premiums) as part of the 7.5% of your adjusted gross income (AGI) that has to be spent on health care before any out-of-pocket medical expenses can be deducted.

The deductibility threshold for medical expenses was briefly set at 10%, rather than 7.5%, from 2013 through 2016. But Congress reduced the threshold back to 7.5% as of 2017, and the Consolidated Appropriations Act, 2021, set 7.5% as the permanent threshold.

A long list of health-related expenses can be included in your total medical expenses, including prescription medications and optional surgical procedures, like laser eye surgery to correct vision. The IRS has a list on its website.

Keep track of the out-of-pocket expenses you incur during the year—including health insurance premiums if you're buying your own plan but are not self-employed (and thus cannot use the self-employment health insurance deduction). If your total costs exceed 7.5% of your AGI, you'll be able to deduct the costs above that threshold, assuming you opt to itemize your deductions—more on that in a moment.

So for example, if your AGI is $50,000 in 2022 and you spend $8,000 on medical costs, including health insurance premiums that you pay yourself and aren't otherwise eligible to deduct, you'd be able to deduct $4,250 worth of medical expenses on your tax return (7.5% of $50,000 is $3,750, so you'd be able to deduct the amount in excess of $3,750 in this scenario, which works out to $4,250).

But in order to deduct medical expenses, you have to itemize your deductions. This is in contrast to the two scenarios described above—the self-employed health insurance premium deduction and the Health Savings Account deduction—both of which can be utilized regardless of whether you itemize deductions.

The Tax Cuts and Jobs Act, enacted in late 2017, substantially increased the standard deduction, making the standard deduction the better choice for most tax filers. In order to benefit from itemizing your deductions, you'll need a lot of expenses that can be itemized. Depending on your medical costs and other itemizable expenses, you may come out ahead this way.

And you should certainly keep track of your medical expenses throughout the year so that you'll be able to sort it all out at tax time. But keep in mind that with the new standard deduction amounts, it's much less likely now that you'll end up itemizing your deductions, including medical expenses.

This is just an overview of how the IRS treats health insurance premiums. If you have questions about your specific situation, but sure to speak with a tax advisor.

Summary

Health insurance premiums can generally be paid with pre-tax dollars. For most people, this just means that their employer-sponsored health insurance is deducted from their paycheck pre-tax, and nothing further has to be done on their tax return.

Self-employed people who buy their own health insurance can generally deduct (on their tax return) the portion of the premiums that they pay themselves. Non-self-employed people who buy their own health insurance can possibly deduct their premiums, but only to the extent that their total medical costs exceed 7.5% of their income, and only if they itemize their deductions.

A Word From Verywell

Chances are, your health insurance comes from your employer and is already being paid with pre-tax dollars.

But if you buy your own health insurance, you may be able to take a deduction for the cost when you file your tax return. This will be available if you're self-employed, and also if you itemize your deductions and your total medical expenses exceed 7.5% of your income (but you can only deduct the portion that exceeds that threshold; not the whole amount).

If you're purchasing your own health insurance, keep in mind that you have to enroll in a plan through the health insurance exchange in your state in order to claim premium tax credits (upfront or on your tax return).

If in doubt about any of this, be sure to check with a tax advisor.

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