The Affordable Care Act, often known by its alternative name of Obamacare, makes health insurance accessible and affordable for millions of Americans. It expands Medicaid eligibility, creates a Health Insurance Marketplace and requires insurers to cover certain benefits.
The Affordable Care Act also includes premium tax credits to reduce the costs of health insurance; these subsidies are calculated based on your modified adjusted gross income.
The Affordable Care Act, or ACA, includes a premium tax credit for individuals whose income falls within 400% of the federal poverty level. Under the American Rescue Plan Act’s provisions for 2021 coverage year and beyond, this credit was increased substantially for 2025 coverage years.
Understanding whether you qualify for tax deductions on health insurance premiums can help you choose a plan option best suited for you. Health insurance premiums generally fall under medical expenses and can be deducted from your taxes; the exact amount may depend on both your income and how you pay for coverage.
Individuals are eligible to claim this deduction only if their insurance premiums are paid directly, without pretax deduction from their paycheck. Furthermore, contributions made directly into an HSA or FSA do not qualify for this deduction; should any questions arise about this matter please reach out to your payroll department so they can determine whether your premium payments qualify as pretax deductions or not.
Employees may deduct contributions they make to their employer’s health insurance plan from their federal income taxes, as the deduction extends to both themselves, their spouses, and any dependent children covered under it. Premiums are deducted pre-tax from an employee’s paycheck before state and federal taxes are withheld, thus saving both parties on payroll taxes such as FICA.
Persons receiving advance payments of the premium tax credit who experience changes in household size or income during the year should notify the marketplace so their premium tax credits can be adjusted appropriately, thus avoiding having to repay advance payments at tax time.
Premium tax credits do not count as income if taken up front and paid directly to your insurer each month, or claimed on your tax return (if purchased off of an exchange). However, premium subsidies that require reconciliation with taxes filed can be considered income.
People who purchase insurance through a marketplace (sometimes referred to as Obamacare) can deduct their premium payments as an adjustment to their gross income, but cannot deduct premium tax credits used towards paying their health plans.
Before the Affordable Care Act (or Obamacare), qualifying medical costs were only tax-deductible if they exceeded 7% of your adjusted gross income. But thanks to Obamacare, that threshold no longer exists – providing even greater tax deductions when filing taxes.
Employees can also take advantage of tax deductions related to group health plans offered by employers as tax deductible benefits, which is reported on employee W-2 forms in box 12, code DD.
Self-employed individuals who own their own businesses may deduct the costs associated with health insurance premiums as an adjustment to their gross income. This deduction applies regardless of what kind of business structure an individual owns – sole proprietors, partnerships, LLCs classified as corporations and 2 percent shareholders are all eligible. It doesn’t need to be itemized.
The Affordable Care Act offers families with a new, refundable tax credit known as the Premium Tax Credit or APTC to assist with health insurance purchased through both state and federal marketplaces. This credit may be applied toward monthly premium charges by insurers or claimed on an individual’s taxes to reduce overall taxes owed or increase refunds.
Most people opt to have their APTC sent directly to their insurer each month; however, those opting to claim it on their tax returns instead may need to adjust advance payments as their income or household size fluctuate over the year.
Premiums paid for private health insurance coverage are generally nondeductible; however, those employed at corporations or other employers may have their premiums deducted directly from earnings. Contributions made to an HSA or FSA account are tax-exempt and do not count towards income.