Don't Miss the Top 10 Insurance-Related Tax Deductions for 2021

Originally published February 16, 2018; Updated February 18, 2019; Updated March 10, 2021

While paying for insurance premiums and medical expenses can be a pain, you might be able to get some of that money back with these insurance-related tax deductions for both personal insurance and business-related insurance.

Make sure you talk with your tax advisor or accountant to make sure you qualify for them – tax laws are ever-changing — and yes, they’re a bit complicated! Here are some great ways to get insurance-related tax cuts based on 2020 tax laws, which you’ll be filing in 2021.

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Personal Expenses That Are Tax Deductible

1) Medical Expenses

Medical expenses can get out of hand, especially if you have any major medical instances in the year.

Keep in mind that your total medical expenses have to exceed 7.5% of your adjusted gross income in order for it to be tax deductible — but it’s worth it to keep track of the expenses, in case you do go over that 7.5% mark.  

Most insurance policies, Medicare and Medicaid should cover the cost of any COVID-19 treatment, but if you do have any medical or travel-related expenses from COVID-19, they are tax deductible if you itemize.  

Additionally, the standard deductible for the 2020 tax year is $12,400 if you’re single and $24,800 if you’re filing jointly. If your medical expenses don’t come near that standard deduction, you won’t be able to deduct them.

If you’re not sure what your adjusted gross income is, you can calculate it using lines 7–37 on Form 1040. The goal is to subtract any expenses from your total income.

The following medical expenses are common examples of things that would be considered tax deductible:

• Acupuncture
• Alcoholism treatment
• Ambulance costs
• Chiropractors
• Crutches
• Dentist
• Dentures
• Doctor fees
• Drug addiction treatment
• Guide dogs
• Hearing aids
• Hospital bills
• Insulin
• Laboratory fees
• Nursing home (if for medical treatment)
• Optometrist
• Osteopath
• Physical therapy
• Psychiatrist
• Psychologist
• Travel to medical clinics
• Vasectomy ‍
• Prescription drugs
• Durable items, like wheelchairs and prescription glasses

Basically, if the item or service is medically necessary and you paid for it out-of-pocket, you can deduct it from your taxes. If your insurance paid for it, you cannot deduct it.

Even transportation expenses for going to the doctor are tax deductible. For example, parking, tolls, mileage, cab or bus fares, airfare and lodging for out-of-town treatments are all tax-deductible medical expenses.

There's a limit of $50 per night for lodging. If you are a parent travelling with a sick child, you can deduct up to $100 a night. For automobile expenses, you can either deduct 20 cents per mile or deduct your actual automobile expenses for medical travel. You can also deduct your parking fees and tolls.  

Publication 554: Tax Guide for Seniors also lists some common medical and dental expenses that are deductible:

• Bandages
• Capital expenses for improvements to your home needed for medical care
• Certain weight-loss expenses for obesity
• Diagnostic devices
• Expenses of an organ donor
• Eye surgery to promote the correct function of the eye
• Guide dogs
• Hospital services feed
• Lead-based paint removal
• Meals and lodging provided by a hospital during medical treatment
• Oxygen equipment and oxygen
• Insulin
• Psychiatric and psychological treatment
• Stop-smoking programs
• Wages for nursing services

Even if you don’t hit this 7.5% mark by the end of the year, it’s still important to keep track of your expenses.

If you do hit this threshold — you don’t want to miss out on these money-saving tax deductions!

2) Health Insurance Premiums

If you pay for health insurance premiums, you might be able to deduct that cost from your taxes. However, you can only deduct health insurance premiums that you pay for with after-tax money and you must pay for it out-of-pocket.

So, if you buy an individual or family health insurance plan and you pay for it out of your own pocket, you can deduct that premium. However, if your employer or the government pays for the premium, you cannot deduct it.

Medicare premiums for Part B, Part D and supplemental premiums for added insurance are tax deductible. Check the information you received from the Social Security Administration to find out your premium.  

If you’ve signed up for Medicare Part D, which covers your prescription drug costs, that premium is actually tax deductible. This is listed in Publication 554: Tax Guide for Seniors:

“Medicare Part D is a voluntary prescription drug insurance program for persons with Medicare Part A or Part B. You can include as a medical expense premiums you pay for Medicare Part D.”

Keep in mind that your total medical expenses from the previous example, in addition to your health insurance premium, must exceed 7.5% of your adjusted gross income.  

For example, if you make $80,000 per year, you can deduct any medical or health insurance expenses in excess of $6,000 that year.

That might sound like a lot, but once you start adding everything up, you might be surprised.

3) Business Liability Insurance Premiums

If you purchased liability insurance to protect yourself for wrongful acts on the job, you can deduct that. However, you can only deduct the premiums if your employer did not reimburse you for the cost. ‍

4) Long-term Care Insurance Contracts

If you don’t know already, long-term care, such as care in a nursing home, is obscenely expensive. The average cost for a month in a nursing home is nearly $8,000.

Many individuals buy long-term care insurance to prepare for those costs if they arise. The government rewards us by offering a tax deduction, but your long-term care insurance must follow a few guidelines in order to qualify:

1. The contract must be guaranteed renewable.

2. The contract can’t provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed.

3. The contract must provide that refunds — other than refunds on the death of the insured or complete surrender or cancellation of the contract — and dividends under the contract must be used only to reduce future premiums or increase future benefits.

4. The contract generally shouldn’t pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer, or the contract makes per diem or other periodic payments without regard to expenses.

Also, the amount you can deduct for long-term care premiums in the 2020 tax year is limited.

• Age 40 or under – up to $430 per person
• Age 41 to 50 – up to $810 per person
• Age 51 to 60 – up to $1,630 per person
• Age 61 to 70 – up to $4,350 per person
• Age 71 or over – up to $5,430 per person

Business-Related Insurance Expenses That Are Tax Deductible

If you own a business or are self-employed (that includes freelancers!), you are eligible for a slew of business-related insurance tax deductions that range from liability insurance to your home insurance.  

1. Insurance that Covers Fire, Storm, Theft, Accident, or Similar Losses

If you carry insurance that protects your business from major accidents like fires or storms (and even theft), it’s tax deductible. ‍

2. Credit Insurance

Credit insurance that covers losses from business bad debts is tax deductible.

3. Medical & Life Insurance for Employees

If you pay for medical insurance for your employees, that’s tax deductible. That includes long-term care insurance. Keep in mind that your personal medical insurance and expenses can be tax deductible, too – go back up to the first section for more information.

Additionally, if you pay for life insurance for any employees, you can deduct the premium as long you aren’t listed as a beneficiary.

4. Liability Insurance, Malpractice Insurance, & Workers’ Compensation Insurance

Liability insurance can be a great addition to your overall financial health as a business. Protecting yourself from risks involving lawsuits and other similar threats is important.

Liability insurance and malpractice insurance are both tax deductible.

Workers’ compensation insurance, set by state law, covers any claims for injuries or job-related diseases, regardless of who is at fault — and it’s tax deductible.  

5. Home Insurance

If you use part of your home for business – for example, you might have a home office where you work regularly – you can deduct expenses for that part of your home.

That includes mortgage interest, utilities, repairs and – you guessed it – insurance.

Keep in mind that you can only deduct the portion of your home you use for work, so if your office is only 10% of your home, you can only deduct 10% of your home insurance.

6. Car Insurance

If you use your car for work, you can deduct your actual car expenses, such as gas, oil, tires, repairs, registration fees and car insurance.

However, if you don’t want to add all of this up each year, you can just claim the standard mileage rate, which is 57.5 cents per mile as of 2020.

Insurance Expenses That Are Not Tax Deductible

While there are a lot of insurance-based tax deductions, there are a few premiums that you simply must live with. These are listed in Publication 529: Miscellaneous Deductions.

Keep in mind that these are not tax deductible, as long you don’t own your own business and you aren’t self-employed.

These premiums include:

1. Home insurance

2. Life insurance premiums paid by the insured

3. Personal disability insurance premiums

4. Premiums paid by your employer

There are also some medical expenses that you can’t deduct, even if you paid for them out-of-pocket.

Some commonly mentioned examples of medical expenses that you can’t deduct (and most are referred to in Publication 554: Tax Guide for Seniors) are:

• Medical marijuana
• Over-the-counter vitamins and drugs
• Hair transplants
• Cosmetic surgery
• Anything paid for by an FSA or HSA account
• Any expenses related to a Medicare Advantage MSA
• Medical insurance included in a car insurance policy covering all persons injured in or by your car

Expenses for your general health (even if following your doctor's advice) such as:

• Health club dues
• Household help (even if recommended by a doctor)
• Social activities, such as dancing or swimming lessons
• Trip for general health improvement
• Contributions to Archer MSAs
• Bottled water
• Diaper service
• Health club dues or household help
• Funeral, burial or cremation expenses
• Nursing care for a healthy baby
• Toothpaste, toiletries, cosmetics, etc.
• Prescription drugs you brought in (or ordered shipped) from another country, in most cases
• Life insurance or income protection policies, or policies providing payment for loss of life, limb, sight, etc.
• Weight-loss expenses not for the treatment of obesity or other disease
• Teeth whitening

Conclusion

There are a ton of insurance-related tax deductions — and you can cash in on them whether you’re retired or you’re self-employed.  

Keep in mind that if you’re a senior, there are some other nice tax breaks, such as retirement contributions, selling your home and even just being 65 or older.

So, how much will you save and what will you do with your savings?