Payments for many types of insurance are deductible. However, for individual taxpayers, insurance premium payments are only deductible if they itemize deductions, typically on Schedule A of Form 1040. Self-employed individuals and independent contractors also claim these deductions on Schedule A. The form that other businesses must file for these deductions differs depending on its type.
Life Insurance Premiums
Generally, individuals are not permitted to deduct the cost of life insurance premiums. The exception to this rule is if you must obtain the policy to benefit a former spouse. In this case, you could deduct the insurance premiums as a form of alimony.
A business owner can deduct life insurance premiums covering themselves or their employees, provided that they are not the beneficiary on the policy. Additionally, business owners who pay for group term life insurance for their employees can also receive an exclusion for the first $50,000 of premiums they pay for of coverage. Any amount over the exclusion must be included as income.
Disability Insurance Premiums
According to IRS publication 529, disability insurance premium payments paid for by individuals are not deductible.
Likewise, as stated in IRS publication 535, business owners cannot deduct the cost of disability policy insurance premiums that are designed to pay them for loss of earnings. However, business owners can deduct the cost of insurance premiums designed to cover the overhead of a business' operating costs if they are disabled. Therefore, whether this deduction is available to business owners depends on the purpose of the policy.
Health Insurance Costs and Premiums
Regardless of whether your health insurance is provided by an employer of if you pay for it yourself, you can deduct the cost of health insurance premium payments.
In addition to premium payments, discussed below, you can deduct the costs of receiving medical care that fell on your shoulders, regardless of whether you have health insurance. If you have insurance, you may only deduct the portion that you actually paid for the medical care. IRS Tax Topic 502 explains that these include fees paid to doctors or other care providers, payments for inpatient hospital or hospice care, and payments for transportation to and from medical care providers or facilities.
Health Insurance Plans Partially Paid by Employer
In this instance, according to IRS Tax Topic 502, you can deduct the portion of insurance premium payments that are not covered by your employer. For example, if your insurance payment costs $400 per month and your employer pays $200 of that cost, you can deduct $200 per month that you pay for the insurance. If you paid for the policy for the entire year, you could deduct $2,400 (12 x 200).
However, the exception to this rule is if your payments are made under a premium conversion policy. A "premium conversion policy" is one in which insurance premiums are paid using pre-tax dollars.
Health Insurance Plans Paid by Self-Employed Individuals
If you are self-employed you can deduct the full amount of health insurance premium payments made for your and your family's health care. You may only take this deduction if you have a net profit from your self-employment.
However, you cannot take this deduction if you are eligible to participate in any plan that is sponsored by an employer, such as one offered by your spouse's employer. This applies to the portion of time for which you were eligible for the plan. For example, if you were eligible to join an employer-sponsored plan for six months out of the year, you could only deduct the six months of premium payments you made when not eligible.
Long-Term Care Insurance Premiums
IRS Tax Topic 502 states that deductible medical care expenses include premium payments made for an insurance policy for long-term care expenses. This option is available to individuals who are self-employed and pay for the entire policy themselves or who have an employer-sponsored plan in which an employer pays a portion of premiums.
Similar to traditional health insurance policies, you cannot deduct the portion of any long-term care policy that is paid for by your employer. Additionally, long-term care insurance premiums paid for under a premium conversion policy are not deductible.
Mortgage Insurance Premiums
Homeowners can deduct the cost of mortgage insurance premiums on their principle place of residence. The premiums must be related to your obtaining debt on your home. Examples of debt include mortgages to build, improve, or buy a qualified home. The exception to this rule is for mortgage insurance provided by the Rural Housing Service or Department of Veterans Affairs.
There is a $1 million dollar maximum for married couples filing jointly or a $500,000 limit for married couples filing separately for this type of debt. Additionally, if a married couple filing jointly earns more than $100,000 or a single individual more than $50,000, the amount of the deduction may be reduced.
Business owners cannot deduct the cost of insurance payments made to secure any type of loan.
Homeowners Insurance Premiums
Homeowners insurance payments, such as those that protect a homeowner against loss or theft of a portion or all of their home, are not deductible. Additionally, according to IRS publication 530, premiums paid for fire insurance coverage are not deductible.
Business Protection Insurance Premiums
Business owners may deduct the cost of fire, theft, accident, and storm insurance that protects their business, trade, or place of business. According to IRS publication 587, a self-employed individual may be able to deduct the amount of homeowners insurance that covers a home office.
Vehicle Insurance Premiums
Generally, individuals cannot deduct the cost of auto insurance premiums. The exception is for individuals who use their vehicle partially for personal and partially for business can deduct the portion of their insurance premiums that are applicable to the business use. However, if you use the standard mileage rate to determine business auto deductions for your personal vehicle, you cannot deduct insurance premiums.
IRS publication 535 states that business owners can deduct insurance premiums for autos and other vehicles that are used in the course of business.
Deducting Your Insurance Payments
The IRS allows for the deduction of certain types of insurance payments. Investigating the rules and requirements for deducting those payments can assist you in reducing the amount of your taxable income. For more information, speak with a tax professional.