Changes with the Affordable Care Act

The Affordable Care Act has brought a great many benefits, but it has brought certain disadvantages, including dramatic increases in the costs of some health insurance policies. Though having health insurance coverage is necessary, the expense can represent a large percentage of an individual or family’s costs, so knowing how to deduct the cost of those premiums is essential.

Taxpayers are allowed to include their health insurance expenses in their individual medical deductions if they itemize, but the amount that can be deducted is limited to what exceeds 10% of their adjusted gross income. Before the Affordable Care Act was passed, this limitation was 7.5% but since the law that lower threshold is only available through 2016 for those taxpayers (or their spouse) if they are 65 or older by December 31st.

In order to help our clients optimize the tax advantages that exist, we want to make sure that we provide updated information on which insurance premiums are eligible to be counted as medical deductions, as well as provide information for self-employed individuals, who may be able to deduct health insurance without the AGI limitation, even if you don’t itemize.

The types of health insurance that are deductible include the following:

  • Premiums Paid through a Government Marketplace less any premium tax credit received
  • Health Care and Hospitalization Insurance
  • Medicare B
  • Medicare C (Advantage Plans)
  • Medicare D
  • Long Term Care Insurance (with certain age limitations)
  • Dental and Vision Insurance

Deductions can be taken on premiums paid for the taxpayer, the taxpayer’s spouse, and the taxpayer’s dependents. They cannot be taken on premiums that are paid for you by your employer or for premiums that you pay yourself for coverage if they are paid through a plan that uses pre-tax dollars.

For those who are self-employed, there is an alternative way of deducting health insurance that permits you to deduct all of the premiums you pay without them being subject to the adjusted gross income reduction and without requiring you to itemize. The payments are not allowed to exceed the net profits you report. 

Partners who provide services to the businesses that they are in partnership with and for whom the partnership pays health insurance premium can treat the payments as part of their gross income. These are deductible by the partnership, and can also be deducted in the same way as is true for those who are self employed.

Unfortunately, when a self-employed individual is eligible for subsidized health insurance coverage, whether from an employer, their spouse’s employer, their dependent’s employer, or as an adult child under the age of 27 of an employee, then the above-the-line deduction is not available. 

However, they can still take the deduction for long-term care insurance (as long as the employer doesn’t offer a subsidy on that coverage as well). This is because long term care coverage is viewed as a separate category from health and hospitalization insurance. It is important to note that for tax purposes, subsidization is defined as the employer paying 50% or more of the costs.

In addition to being available to the self employed and to partners, the above-the-line deduction can also be taken to shareholders in S corporations who hold more than 2% interest.  Shareholders earned income is considered to be their wages from the corporation.

The rules regarding deducting health insurance premiums can be difficult to make sense of.  If you have questions on your own eligibility to deduct these costs, or any other accounting questions, call the professionals at our office for immediate help.

To take advantage of all your tax deductions-

Give us a call at (786) 410-4688 for a consultation!