How Health Insurance Premiums Impact Your Tax Returns

Health insurance premiums not only impact your monthly budget but can also influence your tax returns. If you pay for your own health insurance, especially through a private policy or self-employment, there may be tax benefits to consider. Here’s a guide on how health insurance premiums can affect your tax returns, from deductions to tax credits.

1. Understanding Health Insurance Premiums and Taxes

Health insurance premiums are the monthly fees you pay to maintain health coverage. If you purchase insurance through your employer, the premiums are usually deducted from your paycheck before taxes, which lowers your taxable income. However, self-employed individuals and those purchasing insurance independently may also be able to benefit through deductions and credits.

2. Are Health Insurance Premiums Tax Deductible?

Yes, in some cases, health insurance premiums can be tax deductible. Here’s how it works depending on your situation:

• Self-Employed Individuals: If you’re self-employed and not eligible for any employer-sponsored health plan, you may be able to deduct 100% of your health insurance premiums for yourself, your spouse, and dependents. This deduction is available as an “above-the-line” deduction, which lowers your adjusted gross income (AGI).

• Itemizing Medical Expenses: If you are not self-employed, you may still be able to deduct health insurance premiums as part of your medical expenses on Schedule A if you itemize deductions. However, only the amount that exceeds 7.5% of your adjusted gross income is deductible.

• Employer-Sponsored Plans: Premiums paid through employer-sponsored health insurance plans are generally not deductible since they’re already paid with pre-tax dollars.
  
  

3. Premium Tax Credits for Marketplace Plans

The Affordable Care Act (ACA) introduced the premium tax credit, designed to help offset the cost of health insurance for individuals and families with moderate incomes. Here’s how it works:

• Income Eligibility: The premium tax credit is available if your household income is between 100% and 400% of the federal poverty level (FPL). This range may vary based on family size and state.

• Coverage Level: This credit helps lower your monthly premiums if you buy insurance through the Health Insurance Marketplace, reducing your out-of-pocket costs for coverage.

• Reconciliation on Tax Return: When you apply for Marketplace insurance, your estimated credit is based on projected income. However, if your actual income differs, you may need to adjust (or “reconcile”) the credit on your tax return, possibly resulting in a tax refund or additional tax owed.
  
  

4. Health Savings Accounts (HSAs) and Tax Savings

If your health insurance plan qualifies as a high-deductible health plan (HDHP), you may be eligible to contribute to a Health Savings Account (HSA). HSAs offer tax benefits that can indirectly reduce the impact of premiums by allowing you to save for healthcare costs tax-free. Benefits include:

• Tax-Deductible Contributions: HSA contributions are tax-deductible, lowering your taxable income for the year.

• Tax-Free Growth and Withdrawals: Funds in an HSA grow tax-free, and withdrawals for qualified medical expenses are also tax-free.

• Rollover Savings: Unused HSA funds roll over year to year, allowing you to build a reserve for future healthcare costs without paying taxes on the savings.
  
  

5. The Medical Expense Deduction: What to Know

In addition to premiums, other medical expenses can be deducted if you itemize and they exceed 7.5% of your adjusted gross income. This deduction can cover:

• Out-of-pocket expenses for doctor visits and prescriptions.
• Medical equipment and supplies.
• Qualified long-term care insurance premiums (subject to age-based limits).

While itemizing can be complex, those with high medical expenses in a given year may find substantial savings by combining these deductions with eligible premiums.

6. Flexible Spending Accounts (FSAs) for Additional Savings

If you have an employer-sponsored health plan, you might be eligible for a Flexible Spending Account (FSA). FSAs allow you to set aside pre-tax dollars for qualifying medical expenses, which can include co-pays, deductibles, and other out-of-pocket costs. By using pre-tax dollars, you reduce your taxable income and effectively lower your healthcare costs.

7. Special Considerations for Business Owners

If you own a business, health insurance premiums can also affect your taxes through the following options:

• Small Business Health Care Tax Credit: If you have fewer than 25 full-time employees, pay average wages below a certain threshold, and cover at least 50% of employees’ premiums, you may qualify for a tax credit to offset the cost of providing health insurance.
• Deducting Employee Premiums: Premiums paid for employee coverage are generally tax-deductible as a business expense, which can help reduce your taxable income.
  
  

8. Important Tax Forms for Health Insurance Reporting

As you prepare your taxes, keep an eye out for these common forms related to health insurance and tax reporting:

• Form 1095-A: If you purchased insurance through the Health Insurance Marketplace, this form reports your premium tax credits and coverage details.
• Form 8962: Used to calculate and reconcile the premium tax credit for Marketplace plans.
• Form 1095-B and 1095-C: These forms provide proof of minimum essential coverage from an employer or other insurance provider.
  
  

Final Thoughts on Health Insurance Premiums and Taxes

Health insurance premiums can have a substantial impact on your tax returns, with benefits for both self-employed individuals and those with Marketplace plans. Understanding these potential deductions and credits can help you maximize your tax savings, especially if you pay out-of-pocket for health coverage.

For further guidance on making the most of your health insurance premiums at tax time, Toby Hansen Insurance Agency is here to provide expert advice on the best ways to save. Reach out today to discuss how we can support your health insurance and financial goals!