For an increasing number of us, health care insurance is coming out of our own pockets. Most Americans today who do have health insurance pay at least some part of the costs with after tax dollars. Can these out of pocket medical insurance expenses be deducted on your tax return?

In fact, health insurance premiums are deductible as medical expenses. If they are significant enough in proportion to your adjusted gross income, then you may benefit from including them among your scheduled deductions.

You can deduct medical expenses on Schedule A - Itemized Deductions, to the extent that your total non-reimbursed medical expenses exceeds 7.5% of your adjusted gross income. So, for example, if you make $100k a year and have $10k in medical costs, $2500 of that $10,000 is deductible on your tax return.

Now, in reality, most people don't itemize because it makes more sense to take the standard deduction. If you're one who typically takes the standard deduction and you have high medical costs it might be worth the extra effort to calculate the benefit from itemizing your medical costs.

The best situation of all is to work for a company who will arrange to have all or some portion of your health care insurance premiums taken out of your paycheck before taxes are deducted, in effect trading you lower pay for medical insurance. Paid in this way the very first dollar that goes for health insurance carries with it a built-in tax benefit equal to the Schedule A deduction. There is no 7.5% minimum to overcome before eligibility kicks in.

The applicable part of the tax code is Section 125. This section covers a number of nontaxable benefits, also known as qualified benefits, and how employers can offer a menu of these benefits which employees can purchase out of gross income instead of after-tax dollars.

You may have heard of Section 125 referred to under a more common name: the cafeteria plan.