The COBRA program provides a means to help people continue their existing health insurance when they have a change of employment status for any reason other than gross misconduct. Most employers with 20 or more employees are required to offer COBRA coverage to former employees and their families for which they had provided group insurance while employed.
If you have made any COBRA premium payments you can deduct them on your income tax return as long as your adjusted gross income is less than the IRS limits for phasing out deductions, you meet the minimum threshold for total deductions and you can claim medical deductions greater than 7.5 percent of your adjusted gross income.
COBRA and IRS Medical Deductions
The federal Consolidated Omnibus Budget Reconciliation Act allows eligible employees to continue for a period of time their existing health insurance at the employer's group rate. Upon leaving a job, a former employee can typically use the same medical plan and insurance provider, maintaining continuity and stability while transitioning to new employment. The process to file claims also stays the same – the person would use the same insurance card they've used while employed when obtaining health care. COBRA benefits may continue for up to 18 months after employment ends. People with disabilities can extend the period for a total of up to 29 months. Many employers subsidize health insurance premiums, so employees pay less for their insurance while employed. Former employees on COBRA must cover their portion of the insurance premium, plus the portion the former employer had subsidized while they were working, making the total cost of coverage more expensive under COBRA.
Before completing your tax return, you must decide to either take the standard deduction or itemize all of your expenses. If you go with the standard deduction, you won't be able to take COBRA payments as a deduction.
If your total deductions exceed the standard deduction, you can deduct the payments you make for COBRA coverage, with one caveat: You must have enough medical expenses to exceed 7.5 percent of the adjusted gross income on your tax return. You'll also need to file using the standard IRS Form 1040 for the health insurance deduction, rather than the shorter 1040-EZ or 1040A forms.
COBRA Deduction Limits
You can only deduct costs on your tax return based on what you paid out of your own pocket for expenses, and the costs must have been for yourself as the taxpayer, your spouse or a dependent. If your employer paid for all or part of your COBRA premiums, or if someone else paid for it such as your ex-spouse, you cannot deduct the payments on your own tax return. Additionally, you can deduct medical expenses incurred only in the year for which you are filing the tax return.
2018 Tax Law Changes
Because of the 2017 Tax Cuts and Jobs Act, the standard deductions will be higher in tax year 2018, meaning it will be tougher to get enough expenses to reach the minimum required to itemize. You might find you're better off using the new, higher standard deduction, effective beginning tax year 2018 instead of itemizing. For individuals, the standard deduction is $12,000; heads of household receive an $18,000 deduction and surviving spouses and married couples filing jointly receive a standard deduction of $24,000.
The Tax Cuts and Jobs Act temporarily lowered the IRS medical deductions to a minimum of 7.5 percent of adjusted gross income for tax years 2017 and 2018. After 2018, barring action from Congress, the deduction floor will return to its previous level, requiring total medical costs to exceed 10 percent of adjusted gross income before you can deduct them. Aside from COBRA costs, other allowable medical expenses that you can take to get to 7.5 percent of your adjusted gross income include money spent to diagnose, treat, cure or prevent disease, including expenses for dental work.
2017 Tax Law
As in 2018, the medical deduction only kicks in when your medical expenses are more than 7.5 percent of your adjusted gross income. The medical expense deduction in 2016 only kicked in starting at 10 percent of AGI.
However, the standard deduction is lower in 2017, meaning it may be advantageous in more cases to file itemizing deductions. Specifically, the standard deduction is $6,350 for single taxpayers and $12,700 for married couples filing jointly.
- IRS: Medical and Dental Expenses
- Financial Web: The Pros and Cons of COBRA Continuation Coverage
- Forbes: IRS Announces 2018 Tax Rates, Standard Deductions, Exemption Amounts
- Forbes: IRS Announces 2017 Tax Rates, Standard Deductions, Exemption Amounts And More
- IRS: Itemized Deduction for 2016 Medical Expenses
- Nolo. "What are Employers' Healthcare Insurance Requirements Under the Affordable Care Act?" Accessed Oct. 5, 2019.
- Employee Benefits Security Administration. "COBRA Continuation Coverage." Accessed April 3, 2020.
- The Commonwealth of Massachusetts. "MiniCobra Continuation of Coverage Benefits Guide." Accessed Oct. 5, 2019.
- U.S. Department of Labor. "FAQs on COBRA Continuation Health Coverage for Workers," Page 2. Accessed Oct. 5, 2019.
- U.S. Department of Labor. "FAQs on COBRA Continuation Health Coverage for Workers," Page 3. Accessed Oct. 5, 2019.
- U.S. Department of Labor. "FAQs on COBRA Continuation Health Coverage for Workers," Page 3. Accessed April 3, 2020.
- U.S. Department of Labor. "FAQs on COBRA Continuation Health Coverage for Workers," Page 5. Accessed Oct. 5, 2019.
- U.S. Department of Labor. "FAQs on COBRA Continuation Health Coverage for Workers," Page 6. Accessed Oct. 5, 2019.
- Internal Revenue Service. "Claiming the Health Coverage Tax Credit." Accessed Jan. 21, 2020.
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- Benefits.gov. "COBRA Continuation Coverage." Accessed Oct. 5, 2019.
Cynthia Gaffney has spent over 20 years in finance with experience in valuation, corporate financial planning, mergers & acquisitions consulting and small business ownership. She has worked as a financial writer for online finance publications since 2011, including eHow Money, The Motley Fool, and Sapling.com. She has also edited for several online finance publications, including The Balance, Opposing Views:Money, Synonym:Money, and Zacks.com. A Southern California native, Cynthia received her Bachelor of Science degree in finance and business economics from USC.