Life is unpredictable. One moment everything could be smooth-sailing but everything could fall apart the next moment. And while we can’t avoid such situations, we can safeguard against them. One way to do that is through insurance. Insurance can give us peace of mind. It can help us prepare for the worst by avoiding catastrophic financial liability in the future.
Apart from the safety and security benefits of insurance, there are also some tax-related implications and benefits that you must be aware of. This is true of the insurance policies you buy for yourself, your home, and your possessions, as well as the insurance you may buy for your small business.
While you’re filing taxes, capturing the right detail could come down to your awareness. Many business and individual taxpayers miss out on deductions and credits simply because they did not know about them. The most overlooked deductions include health and medical expenses and insurance premiums. So, yes, it may be true- you may be paying more tax than you should be. You may also be mis-categorizing some insurance-related expenses and that may catch the eye of the tax man later.
Here are some insurance-based deductions you may have missed out. These may give you tax benefits while also giving you that much-needed peace of mind. Keep an eye for information on the kinds of expenses that could qualify as legitimate expenses too.
- Life Insurance
These premiums could often be deducted as a business-related expense. The death benefit provided by life insurance is usually tax-free for individual policyholders and in most cases for business-related beneficiaries as well. However, in some situations, the death benefit for corporate-owned life insurance may be taxable. Employers that offer group-term life coverage to employees can deduct premiums they pay on the first $50,000 of benefits per employee and amounts up to this limit are not calculated as income for the employees.
- Medical Expenses
Medical insurance can help you by reimbursing medical expenses up to a limit. What about after that? Medical expenses that are more than 10% of adjusted gross income are usually deductible. Given the limits, few taxpayers would be able to compile enough unreimbursed bills in a year to qualify for this deduction. However, the 2017 tax law brought about some changes and dropped the threshold to 7.5% for the 2017 & 2018 tax years. If you have enough medical bills pending, you could consider increasing your deduction by scheduling key medical procedures or expenses in the same year and particularly by scheduling as much as possible for the taxes due in 2019.
- Unemployment/Workers’ Compensation
It is vital to note the difference between unemployment compensation and worker’s compensation. Unemployment compensation from a state unemployment agency is awarded to workers who cannot fulfill their duties as a result of an injury. These benefits are always taxable, as they are regarded as a replacement of regular earned income and must be reported on IRS Form 1040. Wikipedia defines Workers’ compensation as “a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee’s right to sue their employer for the tort of negligence.” Workers’ compensation is not declarable as income.
- Health Savings Accounts
A Health Savings Account offers some insurance-related tax perks to your business. These combine a tax-advantaged savings component with a high-deductible health insurance policy. All contributions towards a health savings account, up to the maximum permitted limit by law, are tax-deductible, even for those who don’t itemize. This income accumulates tax-free. All withdrawals from the account are tax-free, as long as they are used to pay for qualified medical expenses.
- Disability Insurance
The disability insurance premium is often neglected as a tax deduction. However, the deductibility of these premiums is complex and often confusing. The IRS allows 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, it also states that “you cannot deduct premiums for a policy that pays for lost earnings due to sickness and disability.” Check with your tax advisor or accountant or to ensure that the deductions you take meet IRS requirements.
- Deductions for the Self-Employed
Self-employed taxpayers are permitted to deduct premiums that are business-related. They can also include health and dental insurance premiums, as well as legal and liability coverage. Vehicle insurance can also be deducted if actual expenses are reported and not standard mileage rate.
So, these are some of the commonly neglected deductions and tax benefits for which both individual and business taxpayers are eligible. Of course, these rules are complex, and the IRS does keep updating them. So, do use this as a guide. But do remember to check with a qualified Tax Advisor on the specific conditions and rules that may apply to you!
Disclaimer: This is for informational purposes only. Please consult your tax professional.