The United States tax code is a complicated beast. The Affordable Care Act, also known as the ACA or Obamacare, didn’t make it any easier. For starters, you can now get a tax credit to help you pay for health insurance. You’ll get fined for not having health insurance, which will be calculated on your annual tax return. There are also tax deductions and pre-tax dollars to worry about.
In this article, we’re going to introduce you to four big ways that health insurance impacts your taxes: the tax penalty, the advance premium tax credit, HSAs and FSAs, and tax deductions. I’ll try and make this as fun as possible, but no guarantees.
The tax penalty for not having health insurance
Call it whatever you want: a penalty, a fine, or the individual mandate – whichever way you slice it, it’s a big chunk of money you have to pay if you don’t have health insurance (and don’t otherwise qualify for an exemption). If you can afford health insurance, you’re subject to this penalty for every month that you don’t have health insurance.
The tax penalty comprises two alternative calculations, and you’ll be responsible for whichever ends up higher:
- Percentage of your household income (2.5% of your household income in 2016)
- Per person ($695 per adult and $347.50 per child under 18 in 2016)
The above numbers are from 2016 – final 2017 penalties have yet to be published, though the percentage is expected to stay the same while the per person fee is expected to increase with inflation.
Each method of calculating the fee has a maximum:
- For the percentage, the maximum fee is equal to the total yearly premium for the national average price of a Bronze plan sold through Healthcare.gov
- For per person, the maximum fee is $2,085
You calculate this fee on your tax return. You’ve probably noticed the past few years that you’ve received a tax form from your health insurance company – forms 1095-A, B, or C, depending on where you got coverage. These forms tell you and the IRS when you had coverage, who in your household was covered by the insurance plan, and the period that you were covered.
When calculating your fee using the percentage method, don’t count the first $10,150 for individuals or first $20,300 for couples filing jointly. Additionally, when using the per-person calculation, only count the people in your household who did not have coverage.
“Short gap” penalty exemption
You can ignore everything above about paying a fine if you only had a short gap in coverage of one or two full months. If you have coverage for even one day of a month, that month does not count as part of your coverage gap. For example: if you did not have health insurance between September 22nd and December 15th, only October and November count as months you lacked coverage. In this example, you would not owe any fee.
If, however, you did not have health insurance between August 22nd and December 15th, the months of September, October, and November would count towards your coverage gap, leaving you open for a fine.
You can only claim this exemption for one short gap, so if you have multiple short gaps in a year, you will owe a fine for some of them.
Additionally, there’s a bit of tax wonkiness if your gap starts in one tax year and ends in another. Let’s say you didn’t have coverage for November and December of 2016. When you filed your taxes for 2016, you should qualify for a short gap exemption, as we described above. Let’s say your gap continues to January of 2017, but you get coverage in February. You might be thinking, “Oh, I only lacked coverage for one month of the year, so I qualify for another short gap exemption!” Nope. Because you lacked coverage for three continuous months going into 2017, you’ll have to pay a fine when you file your 2017 taxes.
When you only have coverage for part of the year, you’ll pay 1/12 of the annual fee for every month you don’t have coverage, assuming you do not qualify for an exemption.
The premium tax credit for health insurance
If you make between 100% and 400% of the Federal Poverty Level in your state, you may qualify for a health insurance subsidy when you purchase a marketplace plan. (Marketplace plans are plans approved for either the federal or state marketplace, though they can also be purchased on private marketplaces.) Subsidies are not available for off-exchange plans, i.e., plans not approved for purchase on a government-run marketplace.
There are two types of subsidies:
- The premium tax credit (or advance premium tax credit), which is intended to lower your monthly premium to an affordable level
- Cost sharing reduction, which reduces your out-of-pocket costs, including your deductible, coinsurance, copayments, and out-of-pocket maximum
You qualify for these subsidies depending on your estimated household income for the year you’re purchasing coverage. (If you’re purchasing 2017 coverage in November of 2016, for example, you estimate what you’re going to be making in 2017.) You’ll estimate this when you’re shopping on either your state marketplace, Healthcare.gov, or a private marketplace.
Note that you’ll only receive a cost sharing reduction if you enroll in a Silver plan.
While you won’t know the exact subsidy you’ll qualify for until you apply, you can estimate your subsidy by visiting Healthcare.gov and using their estimator.
If you qualify for a premium tax credit, you’ll have two options for how to receive it: on your annual tax return for that year of coverage, or in advance. If you receive it on your annual tax return, you will get that money back with the rest of your return. If you get it in advance, you will pay less every month for your health insurance plan (meaning, the government pays that amount directly to your health insurance company on a monthly basis).
When you file your taxes for that year, you’ll calculate a final subsidy amount based on your actual income. If you earned more income than you originally estimated, your tax credit may be smaller than originally estimated (and if you received that money in advance, you may have to pay some of it back). If you earned less income than you originally estimated, you may get more money back.
You’ll see your tax credits on form 1095-A, which you will receive from your health insurer.
Put your pre-tax money in an HSA or FSA to save money on healthcare costs
You can use two kinds of special accounts to save money on healthcare costs: a Health Savings Account (HSA) and a Flexible Spending Account (FSA). Both of these accounts let you set aside pre-tax income for eligible healthcare expenses, saving you potentially hundreds of dollars of income tax.
HSAs are available if you have a high-deductible health insurance plan. If your health insurance plan has a deductible of at least $1,300 (individuals) or $2,600 (families), you qualify for an HSA. In 2017, you’ll be able to contribute up to $3,400 (individual) or $6,750 (family) of your pre-tax income. You can roll over unused contributions from year to year with an HSA.
FSAs are available to anyone, regardless of their deductible, through an employer. However, you may not roll over unused contributions from year to year. The 2016 contribution limit was $2,550. (2017 numbers have yet to be announced.) You may also have an FSA specifically for dependents, including children, a disabled spouse, or an elderly parent, or another dependent that is incapable of self-care.
Note that because the FSA is an employer-provided account, you will lose access to it if you leave that employer.
Many common healthcare services and medical expenses can be paid for using the money in an HSA or FSA. The IRS has a full list on their site, but it includes everything from breast pumps and breastfeeding supplies to a guide dog or other service animal for the visually impaired. Examples of services that you may not pay for using an HSA or FSA include dancing lessons and gym memberships. Basically: as long as it’s a legitimate medical need, you can probably pay for it with your HSA or FSA, but if it just contributes to general health, you probably have to pay for that with post-tax cash.
Tax deductions: when can you deduct health insurance premiums and other health insurance costs?
If you’re a freelancer (or otherwise self-employed) and are not eligible for employer-sponsored health insurance through your spouse, you may be able to deduct your health insurance premiums on your tax return. You enter this write-off on page 1 of form 1040, so you can take it regardless of whether or not you itemize your deductions. Unlike itemized deductions, this tax deduction lowers your adjusted gross income. The amount you write off cannot exceed the amount you earn.
This deduction also applies to partners and LLC members who are treated as partners, even if the partnership or LLC pays the premiums. In this case, it’s best to talk to your accountant about the tax reporting rules that apply to you.
If you own a small business with employees and you pay health insurance premiums for them, you can deduct these premiums as an “employee benefit program expense.” Depending on the structure of your business, this deduction will go on a different form and line.
Questions about your taxes or your tax return? Your best bet is to contact a local accountant who deals specifically with tax issues, or use an online program like TurboTax that can walk you through your forms and return.