COBRA provides health insurance, and potentially a tax deduction, when you're unemployed. Jupiterimages/Comstock/Getty Images If you lose your job, you're usually entitled to continue your current health insurance through provisions under the Consolidated Omnibus Budget Reconciliation Act of 1985, but you have to pay the premiums. If you're paying out of pocket, you might be able to translate those COBRA premiums into a tax deduction as part of the medical expenses deduction. COBRA PremiumsHealth insurance premiums that you pay out-of-pocket count as a deductible medical expense. COBRA premiums count as a deductible health insurance premium as long as you're paying the premiums yourself. If your employer is still subsidizing your premium, you can't deduct that portion. For example, say your premium would be $400 per month, but your employer subsidizes $50 of it so you only pay $350. You can only include $350 of the premium in your deduction. Premiums for FamilyIf your COBRA coverage also includes coverages for your family, you might also be allowed to deduct those costs. Besides your own premiums, you can also include the premiums you paid for your spouse and anyone you claim as a dependent. For example, if your COBRA premiums cover your spouse and your dependent son, you can include the full amount of the premiums. Income ThresholdDespite the fact that you pay the COBRA premiums, they might not amount to enough to actually result in a tax deduction. The medical expenses deduction only allows you to write off the premiums that exceed 7.5 percent of your adjusted gross income. For example, say you have an AGI of $35,000 because you only worked part of the year. If your COBRA premiums total $6,000, you can only deduct $2,625 -- plus any other qualified medical expenses paid in the same year. Itemizing RequiredThe medical expenses deduction is an itemized deduction, which means that you're only allowed to claim it if you use Schedule A and forgo the standard deduction. For example, if you're married filing jointly in 2013, your standard deduction is $12,200, so it doesn't make sense to give it up just for a $2,625 deduction for COBRA premiums. But, if you have other itemized deductions, such as mortgage interest or donations to charity, that make your itemized deductions worth more than the standard deduction, then it makes sense to itemize. References Writer Bio Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool." Yes insurance premiums are deductible under medical. You have added on to a 5 year old thread. Now it’s over 7.5% of your AGI. Do you think you will have enough to itemize this year? This year the Standard Deduction will be doubling so many people will be switching to the Standard Deduction. And there is a max 10,000 limit (5,000 MFS) of property tax and state taxes "SALT". FAQ on 2018 changes <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/4482394-how-will-tax-reform-affect-my-2018-federal-tax-return">htt...> For 2018 the standard deduction amounts are: The Internal Revenue Service (IRS) has released two pieces of guidance, Notice 2021-31 and Notice 2021-46 (the Guidance), discussing the COBRA subsidy provisions of the American Rescue Plan Act (ARP). See our initial alert on the substantive aspects of the Guidance, “IRS Releases Guidance on COBRA Subsidies,” here. Under the Guidance, the IRS provides much-needed details on how multiemployer plans, employers with self-insured plans, or insurers (Payees), can claim the COBRA subsidy tax credit (the Credit) to offset mandatory payment of fully subsidized premiums for certain COBRA qualified beneficiaries. Notice 2021-46 also provides helpful information to identify the common law employer for this purpose. This updated Guidance is helpful in light of the upcoming July 31, 2021 deadline for filing Form 941 for Q2. The Guidance provides three methods for claiming the Credit for employers paying the premium or reimbursing employees for premiums for coverage periods April 1 through September 30:
As with method two, an advance cannot be requested for a period of coverage that has not yet started; however, Form 7200 can be filed at the end of the payroll period in which the employer became entitled to the Credit. In addition, note that Form 7200 must be submitted before the earlier of (1) the date the Form 941 for the applicable quarter is filed, or (2) the last day of the month following that quarter. The employer must also report the advance payment received and claim the tax credit on Form 941. Income Tax Consequences: Finally, note that the value of the Credit is included in gross income to the employer. However, an employer generally could also claim a deduction for this amount. The amount of the COBRA premium assistance is not taxable to the COBRA qualified beneficiary in receipt of the benefit. Winston Takeaway: Given the potential administrative challenges with accurately calculating the exact amount of COBRA premium tax subsidy and employment tax liabilities, most employers will consider simply filing a Form 941 to claim the COBRA Premium tax credit. Form 941 and Instructions have been updated for this purpose. Employers for whom waiting for reimbursement poses a hardship should be careful to accurately assess employment tax liability for each quarter and closely follow the timing rules on when employment taxes can be withheld and the advance claimed. Please contact a member of the Winston & Strawn Employee Benefits and Executive Compensation team for further information. |