Healthcare

The Latest On Medical Insurance And Your Taxes

The Latest On Medical Insurance And Your Taxes

As 2018 winds down and you begin to think about their taxes, it’s essential that you don’t forget about how health insurance will impact your status. Though the penalties for not having health insurance compliant with the Affordable Care Act were eliminated by the tax reform act passed at the end of last year, they remain in effect for this tax year. That means that if you and your family haven’t been covered, you’re subject to a penalty of either 2.5 percent of your family’s household income, or $2,085 – whichever is more. In short, what that means is that you needed to make sure that you and yours had health insurance this year, or otherwise you’re going to take a big financial hit at tax time. 

Assuming that you did have coverage, knowing what your options are concerning tax benefits can make a huge difference in the refund you’re entitled to or the amount of tax that you owe. Here’s a quick rundown of all the different scenarios and how they may affect you.

Employer-Provided Health Insurance

If you are a W-2 employee working for a company that has 50 or more full-time-equivalent employees, then your company has no choice but to make available to all full-time employees an affordable health care option. Failure to make this type of coverage would put them in line for paying federal penalties, so at the very least they have to provide access. Though your employer has no legal obligation to pay the premiums for the health care coverage that they facilitate, most offer paid insurance within the compensation package that they offer their employees, even if the number of full-time employees that they have on staff falls under the number that requires their participation. 

If you are on the receiving end of this type of benefit and have to pay any percentage of the premiums for your coverage, that amount can be itemized on your taxes as a medical deduction. If you receive some type of statement from your employer indicating the amount that they pay for your health insurance premiums, you are not entitled to include that amount within your itemized deduction unless the cost is being withdrawn from your pre-tax compensation and is a line item on your Form W-2. Individuals who are self-employed can take an above-the-line health insurance deduction on their health insurance premiums as long as they fall within specific parameters, which will be spelled out later. 

Employer Health Reimbursement Arrangements (HRAs)

A health reimbursement arrangement is an IRS-approved health benefit in which employers set aside pre-tax dollars into an account that employees can use to pay for out-of-pocket medical expenses and individual health insurance premiums. The value of an HRA account does not get included in gross income, and as a result, it is also not available for use as a tax deduction. 

Self-Employed Health Insurance Deduction

People who are self-employed can use the full amount that they pay for medical insurance as an above-the-line business expense to reduce their total taxable income. Though self-employed individuals lose their ability to itemize medical deductions, the above-the-line deduction generally offers a more significant advantage as no income-based limitations are imposed as they would be on itemized deductions. That tax benefit can also be used by the self-employed individual’s spouse and dependents as long as the amount that’s deducted isn’t more than their actual net earnings derived from self-employment. The same is true for partners or shareholders of an S corporation that hold more than 2% interest in the business, though those shareholders can only take advantage of the deduction if the insurance offered by the company is part of their wages.

One important note about the rules for self-employed individuals: if at any point during the tax year they are covered by (or eligible for) employer-subsidized health insurance, then during each month of that coverage or eligibility they are not able to take the above-the-line deduction, and the same is true for their dependents, their spouse, or any children under the age of 27 before the end of the tax year. For this rule, the term subsidized refers to the employer paying fifty percent or more of the premium cost. Also, for plans that encompass but do not subsidize long-term care coverage, that portion of the payments can be deducted on any payments made for those premiums, with the deduction based on the taxpayer’s age and the maximum allowed.

Itemized Medical Deductions

In 2018, to take a deduction for qualified medical expenses (including the costs of medical insurance), the taxpayer needs first to check to see whether they are eligible by calculating their adjusted gross income (AGI). The total amount of those expenditures must be more than 7.5 percent of the calculated number, and your total itemized deductions have to be more than the standard deduction. After 2018, that threshold will jump from 7.5% to 10%, making it even harder for people to itemize deductions for medical expenses.

Deductible Medical Insurance

The best way to make sure that you are taking advantage of all of the deductions that the IRS permits for medical expenses, study the following list of what is allowed and make sure that you track the amount that you spend on each of these types of coverage: dental; lost or damaged contact lenses; medical; hospital; long-term care up to the maximum allowed based on your age; prescription drugs and insulin; Medicare-B and D and supplemental Medicare insurance. If you pay for your insurance through the Health Insurance Marketplace, you’re also able to deduct the amount of those premiums, though you do have to subtract any premium assistance credit that you receive.

The rules surrounding health insurance write-offs are complex. To make sure that you’re taking advantage of every benefit available to you, check in with a tax professional.

Gordon W. McNamee, CPA writes for TaxBuzz, a tax news and advice website. Reach him and his team at [email protected]

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Gordon W. McNamee

Gordon W. McNamee

Gordon W. McNamee is a Certified Public Accountant (CPA) based in Rancho Cucamonga, CA. Gordon W. McNamee can assist you with your tax return preparation, payroll, accounting and tax planning needs. <br /> <br /> 2021 is Gordon W. McNamee, CPAs 38th year in the profession. As as a former IRS agent (1984 through 1987), Gordon has been in public accounting since 1987. Gordon specializes in individual, corporate, HOA, trust, estate and payroll taxes. He also prepares financial statements and provides accounting & bookkeeping services. He enjoys making his clients feel at ease while providing a personalized professional service.

GORDON W. MCNAMEE, CPA
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