Half of American adults mistakenly believe they can write off their insurance premiums when they file a tax return, according to a recent ValuePenguin survey.
The notion that you can deduct home, health, auto or life insurance premiums is only wishful thinking for most people. But 49% of Americans do not realize this, the survey found.
Those who are most likely to be mistaken about the deductibility of insurance premiums are men and people with high incomes, according to ValuePenguin. As a group, baby boomers are least likely to hold such a misunderstanding.
There are some instances where people can write off such premiums, but they only apply under specific circumstances. Examples of situations where you can write off insurance premiums include the following.
Deducting home insurance premiums
If you work from home, you might be able to write off a portion of your homeowners insurance if you have a space — such as a home office — that is used exclusively for work. You can learn more about this in “7 Things to Know Before Deducting a Home Office.”
People who rent out their homes also might be able to classify their homeowners insurance as a business expense in some cases.
Usually, you need to buy landlord insurance to cover a rental. But Allstate says if you are just renting out a portion of the home — like a room — standard homeowners insurance might cover you. And in some of those situations, you might be able to deduct premiums.
However, be careful here. Don’t just assume that you can use your homeowners policy to cover the portion of a home you are renting out to someone else. As ValuePenguin says:
“Each insurer’s stipulations are different, but it’s common for providers to waive coverage when a homeowner exceeds a certain income level from rental fares — the extra money one takes in from renting a home could void the protections offered by an insurance policy.”
ValuePenguin notes that overall, circumstances in which you can deduct home insurance premiums apply to relatively few homeowners.
Deducting auto insurance premiums
If anything, the number of people who can legitimately deduct auto insurance premiums is even smaller than those who can write off homeowners insurance.
As a general rule, you cannot write off your auto insurance premiums unless you own a car that you use for business purposes.
Deducting health insurance premiums
The deductibility of health insurance premiums is a bit more complicated. So, let’s start with the basics: Most people cannot write off what they pay for health insurance.
However, there are some people who can legitimately write off premiums. According to the IRS, they can include:
- Taxpayers who itemize their deductions (as opposed to taking the standard deduction): Generally, they can deduct a portion of their medical expenses — including health insurance premiums — if their total deductible medical expenses exceed 7.5% of their adjusted gross income. Note that this is true only of premiums that taxpayers themselves pay, not premiums that an employer covers.
- Self-employed workers: Generally, they can deduct health insurance premiums they pay to cover themselves, their spouse and their children — even if they don’t itemize their deductions.
- People who purchase their own policy through a health insurance marketplace (such as those created by the federal government or a state government): Depending on their income and assuming they otherwise qualify for it, these taxpayers may be eligible for the premium tax credit, which is meant to help them cover the cost of their health insurance premiums.
Tax laws are complicated, and we’ve just scratched the surface here. The key lesson to remember is that in most situations, it is a mistake to think you can write off insurance premiums.
If you are unsure whether you are eligible for such deductions, find a tax professional who can help you sort out the matter. For more, check out “How Can I Find a Good Tax Accountant?“