Self-Employed

If you are self-employed or are not covered by any employer plan, you can deduct the costs of medical insurance as an above-the-line deduction, meaning you can still take the standard deduction as well.

Medical Expenses

Health insurance is one of a number of costs that qualify for the medical expenses tax deduction, an itemized deduction.

Limits

You can only deduct the medical expenses that exceed 7.5 percent of your adjusted gross income. For example, if your adjusted gross income is $65,000 and your medical expenses are $7,875, you would be able to deduct $3,000.

Policies Not Deductible

Some types of policies are not deductible as medical expenses no matter your employment situation. These include policies, such as disability insurance, policies that pay cash for loss of limbs or replace income in case of hospitalization and car insurance policies that also cover personal injury.

Time Frame

Medical expenses deductions occur when you pay the cost, not in the year that you receive the treatment or coverage. For example, if you have surgery in December 2009 but don't pay for it until January 2010, you must deduct it on your 2010 tax return.

Source:

IRS: Tax Topic 502; Medical and Dental Expenses

Bankrate: Deductible Health Insurance Premiums; George Saenz

MSN Money:10 Big Deductions too Many People Miss; Jeff Schnepper