COBRA payments are not tax deductible for most people, but there are narrow exceptions depending on your situation and income level

COBRA is the federal law that lets you keep your employer's health insurance for a limited time after you leave a job. You pay the full premium yourself — both the part your employer used to pay and your own share — plus a small administrative fee. The IRS does not treat these payments as a deductible medical expense for most workers.

The reason is straightforward: the IRS only lets you deduct medical expenses that exceed 7.5% of your adjusted gross income, and only if you itemize deductions instead of taking the standard deduction. For most people, the standard deduction is larger, so itemizing does not help. Even if you do itemize, COBRA premiums count as medical expenses, which means you still need other medical costs to push you over that 7.5% threshold before any of it becomes deductible.

There is one real exception: if you are self-employed or own a business, you may be able to deduct health insurance premiums — including COBRA — as a business expense rather than a medical expense. This works differently and does not require you to meet the 7.5% threshold. If this applies to you, talk to a tax professional or accountant, because the rules depend on how your business is structured.

Key Takeaways

  • COBRA premiums do not reduce your taxes unless you itemize deductions and your total medical expenses exceed 7.5% of your adjusted gross income.
  • Most people use the standard deduction, which is larger than itemized deductions, so COBRA payments provide no tax benefit for them.
  • Self-employed people and business owners may be able to deduct health insurance premiums as a business expense, which works under different rules.
  • If you received a subsidy through the Affordable Care Act marketplace instead of using COBRA, those premiums may have different tax treatment.

How the medical expense deduction actually works

The IRS lets you deduct medical and dental expenses, but only the amount that exceeds 7.5% of your adjusted gross income. Your adjusted gross income is the number at the bottom of your income section on your tax return — it includes wages, self-employment income, and some other sources, minus certain deductions.

Here is a concrete example: if your adjusted gross income is $50,000, the threshold is $3,750. You can only deduct medical expenses above that amount. If your COBRA premiums for the year are $2,500, they do not reach the threshold, so you get no deduction. If your COBRA premiums are $5,000 and you have no other medical expenses, you can deduct $1,250 — the amount above $3,750.

To use this deduction at all, you must also itemize deductions on your tax return instead of claiming the standard deduction. The standard deduction for 2024 is $14,600 for single filers and $29,200 for married couples filing jointly. Unless your itemized deductions — including medical expenses, state and local taxes, mortgage interest, and charitable donations — add up to more than the standard deduction, you will not benefit from deducting COBRA premiums.

When self-employed people get a different result

If you are self-employed, a sole proprietor, or a partner in a partnership, you may be able to deduct health insurance premiums as a business expense. This is called the self-employed health insurance deduction, and it works on your tax return before you calculate adjusted gross income — which means it does not require you to meet the 7.5% threshold.

The catch is that you can only deduct premiums for months when you did not have access to employer-sponsored insurance through another job. If you left your job and are using COBRA while you build a business, you may may have access to. If you are self-employed but your spouse has employer insurance that covers you, you cannot use this deduction.

The rules here are detailed and depend on your business structure — whether you are a sole proprietor, an S-corporation, an LLC taxed as a corporation, or something else. A tax professional or accountant who knows your situation can tell you whether this deduction applies to you and how much you can claim.

COBRA versus marketplace insurance and tax credits

COBRA is not the only way to keep health insurance after you leave a job. You can also buy insurance through the Affordable Care Act marketplace (also called the health insurance exchange), where you may be able to receive a premium tax credit that lowers your monthly cost.

Premium tax credits work differently from deductions. A credit reduces the taxes you owe dollar-for-dollar, whereas a deduction only reduces the income that gets taxed. If you receive a premium tax credit, the government pays part of your premium directly to the insurance company, and you pay the rest. You do not deduct the premium on your tax return — instead, you report the credit you received.

For many people, especially those with lower incomes, the marketplace with a tax credit is cheaper than COBRA. COBRA premiums are often 102% of what the employer paid, which can be expensive. The marketplace may offer lower premiums, and if your income qualifies, a tax credit can make the cost much lower still.

What to do if you are paying COBRA and want to understand your tax situation

Start by gathering your COBRA premium statements for the year. These show exactly what you paid and when. Then look at your total medical and dental expenses — include premiums, copays, deductibles, prescription costs, and any other out-of-pocket medical costs.

Calculate 7.5% of your adjusted gross income. If your total medical expenses are below that number, COBRA premiums will not reduce your taxes unless you are self-employed. If they are above it, you may benefit from itemizing deductions, but only if your total itemized deductions (medical expenses plus state and local taxes, mortgage interest, charitable donations, and other deductible items) exceed the standard deduction.

If you are self-employed or own a business, or if your situation is complicated, talk to a tax professional before filing. The rules around business structure and health insurance deductions are specific enough that a mistake can cost you money.

Frequently Asked Questions

Can I deduct COBRA premiums if I am unemployed?

Only if your total medical expenses exceed 7.5% of your adjusted gross income and you itemize deductions. Unemployment income counts toward your adjusted gross income, which raises the threshold you need to meet. Most unemployed people do not reach it.

What if my employer paid part of my COBRA premium?

Some employers offer a subsidy that covers part of the COBRA cost. The part your employer paid is not taxable income to you, and you cannot deduct it. You can only deduct the part you paid yourself, and only if you meet the 7.5% threshold and itemize.

Does COBRA count as health insurance for the tax penalty?

COBRA is may have access to health insurance, so it satisfies the requirement to have coverage. There is no federal tax penalty for being uninsured, but some states have their own rules. Having COBRA means you meet the coverage requirement.

If I switch from COBRA to marketplace insurance mid-year, how do I report both?

You report all health insurance premiums you paid during the year. If you received a premium tax credit for the marketplace portion, you report that credit on your tax return. The COBRA portion is treated as a medical expense for deduction purposes, subject to the 7.5% threshold.

Should I choose COBRA or marketplace insurance based on tax deductions?

Tax deductions should not be your main reason to choose one over the other. COBRA is usually more expensive than marketplace insurance, especially if you may have access to for a premium tax credit. Compare the actual monthly costs first, then talk to a tax professional about how each option affects your taxes.