Insurance and tax premiums have one thing in common. We love to hate paying both of them. However, as much as we hate paying these taxes and insurance, paying them is mandatory.
Health insurance is something most Americans can’t live without. Fortunately, there are so many types of health insurance, and the premiums for health insurance are relatively cheaper than other insurance covers.
However, the million-dollar question is, does having health insurance also affect your taxes? A simple yes or no answer wouldn’t suffice for most people.
In this piece, we’ll look at whether health insurance and taxes go hand-in-hand. If they do, we’ll explore how these two go hand-in-hand. Reading this will be of great help in your financial organization come the 15th of April.
Does Health Insurance Affect Taxes?
The simple answer is yes, health insurance does affect your taxes. However, even if you don’t have health insurance, you’ll still need to pay the taxman.
The 2010 Affordable Healthcare Act (ACA) made things more complicated for healthcare and taxes. This act made health insurance available for more people but also complicated the tax situation.
The Relationship Between Health Insurance and Taxes
Health insurance is among the more complicated types of insurance. It gets even more complicated if you fit specific criteria.
Where you get your health insurance, significantly affects your tax situation in regards to health insurance. Here are some common health insurance types and how they impact your tax return.
Health Insurance Exchange
This kind of insurance is for people who don’t get insured by their employers or are self-employed. This type of insurance is a bit tricky for both you and the IRS since it can be hard to predict your future income, for the case of self-employed individuals.
For this type of insurance, the government may pay insurance premiums upfront. Alternatively, you may qualify for subsidy when you are filing your tax returns. However, all these depend on your current income level.
For the self-employed, you can deduct the total amount you paid for you and your family’s health insurance from your tax payments.
Health Insurance from Employers
Most people get their health insurance from their employers. In this type of health insurance, you pay a portion of the insurance premiums, and your employer pays the rest.
Your employer, however, pays their part of the premium with pretax dollars. Pretax dollars mean the deductions are before they pay income taxes to the federal government. Thus, the state can withhold the amount for other taxes.
The amount the federal government withholds depends on the allowances that you indicate on your W4 form.
Minimum Essential Coverage
The ACA mandates every citizen must take part in facilitating healthcare for everyone. However, not everyone qualifies for minimum essential coverage. This insurance is only for low-income families.
Your tax returns are how the government determines your eligibility for health insurance. There are a couple of ways you can get this coverage. Here are a few:-
- Government-sponsored programs
- Employer health coverage
- Direct policy from an insurance company
- The Department of Health and Human Services
The Health Insurance Marketplace
You may choose to settle for a health insurance plan from the marketplace. However, for tax purposes, you’ll have to get an estimate of your household’s gross income.
That includes even your spouse’s income as long as you accurately reflect your household’s income situation. This amount may determine if you qualify for lower health insurance premiums.
A couple of things you should include when reporting your gross income include:-
- Payments for social security
- Income from business and self-employment
Individual Premium Tax Credits
If you get healthcare from the marketplace, you may be liable for premium tax credits. A viable insurance option is a short term health insurance plan. You can cancel this plan anytime and also qualify for premium credits.
Here are a couple of ways you can be viable for premium tax credits
- Not be dependent on any other person
- Obtain your insurance from the health insurance marketplace
- You can’t be viable for a government-offer plan or one your employer offers
- Your income must be within a certain range
- If you’re married, you can’t file separately
How Does Not Having Insurance Affect Your Taxes
You’re also liable for taxes even if you don’t have a health insurance plan. Also, remember health insurance is mandatory unless you fit the exemption criteria. For some states, there is a tax penalty for not having insurance.
These exemptions for health insurance include hardship exemptions for individuals facing hard times like homelessness or eviction. This exemption applies all through the hardship period.
This penalty is based on your household income or income per individual in your household. You can calculate the penalty through this penalty calculator.
Ways to Maximize Your Tax Benefits From Health Insurance
You can get plenty of benefits if you get your health insurance from your employer. You can save a lot between the taxes and monthly premiums.
For the most benefits, confirm if your employer’s plans come with the following:-
Flexible Spending Account (FSA)
This allows you to keep the money from your payment before tax for qualified medical expenses. You set it up at the start of the year and must use the funds before the year ends.
Health Savings Account (HSA)
Similar to FSA, where you set money aside from income pretax. However, it is only applicable to people with high-deductible health plans.
Health Insurance and Taxes Do Go Hand-in-Hand
Hopefully, we’ve established that health insurance and taxes are somewhat inter-related. However, not the same caveats apply to everyone. The taxes you end up paying for health insurance varies with your situation.
Now, remember, you’re still liable for taxes even without health insurance. Also, you must have health insurance in most states. The penalty you pay will be way more than the health insurance premiums.
For more informative reads, be sure to check out the other captivating articles.