Can i deduct cobra payments from my taxes

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.

​Read More:​ Are Medical Expenses Deductible? What You Need to Know

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.

References

• Dol.Gov: Continuation of Health Coverage (COBRA)
• Dol.Gov: FAQs on COBRA Continuation Health Coverage for Workers
• CMS.Gov: COBRA Continuation Coverage Questions and Answers
• IRS.Gov: Publication 502 (2020), Medical and Dental Expenses

Resources

• IRS: Form 1040

Writer Bio

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.

For questions about the COBRA subsidy under the American Rescue Plan of 2021, see Notice 2021-31, 2021-23 IRB 1173 and Notice 2021-46, 2021-33 IRB 303. For questions about the extended timeframes due to the Novel Coronavirus Disease (COVID-19) Outbreak, see Extension of Certain Timeframes for Employee Benefit Plans, Participants, and Beneficiaries Affected by the COVID-19 Outbreak at 85 FR 26351 and EBSA Disaster Relief Notice 2021-01.

For the questions and answers about the American Recovery and Reinvestment Act of 2009, see below.

Change in Eligibility

Q1. I just started a new job that provides group health insurance, so I am no longer eligible for the COBRA subsidy. How do I notify my former employer that I should no longer receive the subsidy? (updated October 15, 2021)

A1. If you become eligible for other group health coverage (such as coverage from a new job) or Medicare coverage, you're no longer eligible for the COBRA subsidy. You must notify the health plan that's been providing your COBRA coverage that you're no longer eligible for the subsidy. This notification must be made in writing.

Once you become eligible for other group health coverage or Medicare, you're no longer eligible for the COBRA premium subsidy, regardless of whether you actually enroll in the other group health coverage or Medicare. Once eligibility for the subsidy ends, if you continue to receive COBRA coverage, you must pay the full COBRA premium without the subsidy, in addition to notifying the health plan.

Q2. What happens if someone fails to notify their plan that they are eligible for other group health coverage or Medicare? (updated September 2, 2009)

A2. An individual who fails to notify the health plan providing COBRA coverage and continues to receive the COBRA premium subsidy after they are eligible for other group health coverage or Medicare may be subject to a penalty under IRC § 6720C. This penalty is equal to 110% of the subsidy provided on the individual's behalf after they became eligible for the other coverage or Medicare. 

Q3. How does a person report the new penalty to the IRS? (updated September 2, 2009)

A3. Anyone who failed to notify their plan that they are no longer eligible for the COBRA subsidy should self-report that they are subject to the penalty by calling the IRS toll-free customer help line at 800-829-1040. In addition, the individual must notify their plan that they are no longer eligible for the COBRA premium subsidy.

Anyone who suspects that someone may be receiving the subsidy after they become eligible for group coverage or Medicare may report this to the IRS by completing Form 3949-APDF, available on this website. The completed form should be printed and mailed to:

Internal Revenue Service
Fresno, CA 93888

More information about the informant procedures may be found in How Do You Report Suspected Tax Fraud Activity? 

Taxability of Subsidies

Q4. Is the COBRA premium subsidy taxable income for the individual? (updated February 26, 2009)

A4. The premium subsidy is not included in the individual's income. However, there is a phase-out of eligibility for the subsidy, which will increase some high-income individuals' tax liability if they receive the subsidy. The phase-out impacts individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. Tax liability is increased, to achieve repayment of a portion of the subsidy, for those taxpayers whose modified adjusted gross income is between $125,000 and $145,000, or $250,000 and $290,000 for those filing joint returns. If a taxpayer's modified adjusted gross income exceeds $145,000, or $290,000 for those filing joint returns, the full amount of the subsidy must be repaid as an additional tax. There is no additional tax for individuals with modified adjusted gross income less than these income levels. 

Q5. Is the 65% subsidy subject to state income tax? (updated March 19, 2009)

A5. The premium subsidy is not included in income for federal tax purposes. However, its treatment for state income tax purposes is determined under state law and depends on the tax law of the particular state.