When it comes to filing taxes, getting the best returns is not about skill – it's about what you know. Unfortunately, many taxpayers miss out on deductions and credits simply because they just aren't aware of them. Several of the most overlooked deductions pertain to health and medical expenses, and insurance premiums. Are you paying more tax than you need to? Read on for some insurance-based deductions you may be missing.
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Disability Insurance
Disability insurance is probably the most common type of premium that is overlooked as a tax deduction. The deductibility of these premiums, is complicated, however. The IRS permits self-employed taxpayers to deduct "overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness." However, "you cannot deduct premiums for a policy that pays for lost earnings due to sickness and disability. Check with your accountant or other tax advisor to make sure any deductions you take meet IRS requirements.
Also note: If you deduct the premium, any benefits paid from the policy will be considered taxable income. By contrast, policy benefits will not be taxable if you do not deduct the premium, and some taxpayers use this arrangement so that they can receive tax-free benefits if they become disabled. (The Disability Insurance Policy: Now In English will show you how to translate this complicated type of policy.) Benefits are also taxable if your employer paid for your disability insurance, rather than if you bought it yourself with your own after-tax dollars.
Health Savings Accounts
Another insurance–related tax perk that people without access to traditional group health coverage should be aware of is health savings accounts, which combine a tax-advantaged savings element with a high-deductible health insurance policy. All HSA contributions, up to the maximum permitted by law, are tax-deductible, even for those who do not itemize, and earnings accumulate tax-free. All proceeds withdrawn from the account are tax-free, provided they are used to pay for qualified medical expenses.
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