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.
So, is COBRA tax deductible? Yes, cobra payments are tax deductible sometimes. However, there are conditions you must fulfill.
How COBRA Works
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.
COBRA: Itemized Deductions
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 file using the standard IRS Form 1040 and Schedule A for the health insurance deductions.
Read More: Form 1040: What You Need to Know
COBRA Deduction Limits
You can only enjoy cobra tax deduction 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.
2021 Tax Law Changes
Thanks to inflation, the standard deductions and tax brackets are higher for the tax year 2021. That also means it may be tougher to get enough expenses to reach the minimum required to itemize. So, you might find you're better off using the new, higher standard deduction instead of itemizing.
For singles, married but filing separately, and surviving spouses, the standard deduction is $12,550, while married couples have a limit of $25,100. Also, heads of household receive an $18,800 deduction.
The Tax Cuts and Jobs Act lowered the IRS medical deductions to a minimum of 7.5 percent of adjusted gross income. Those deduction limits are still in place for the tax year 2021.
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.
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.