Affordable Care Act
Health Insurance Tax Tips You Need to Know
Published on April 01, 2014
Many consumers overlook credits and deductions built into the tax code that are designed to make medical care and health insurance more affordable.
Consumers who had high medical expenditures, who were self-employed or owners of small businesses, or who cared for aging parents should educate themselves on the opportunities to deduct a portion of their expenses from their federal income tax.
With new provisions of the Affordable Care Act now in effect, tax season is also a good time for consumers to educate themselves on the possible tax consequences of receiving a government health insurance subsidy or going without health insurance for more than three consecutive months.
Here are eHealth’s top health insurance tax tips for the most recent tax year:
- Look out for the 2014 tax penalty for going uninsured. For the first time, in 2014 most Americans were required to have health insurance in one form or another. If you didn’t have employer-based coverage and were not enrolled in Medicare or Medicaid, and you didn’t otherwise qualify for one of the exceptions provided by the law, you may have been required to purchase coverage on your own. If you were uninsured for more than three consecutive months in 2014, you may trigger a tax penalty on your 2014 federal tax return. The penalty is $95 per adult (less for children) or 1% of your income, whichever is greater. This is the first tax season many people will have to deal with these penalties, and they’ll increase in future years. If you don’t have coverage in place for 2015 and want to avoid a repeat of this penalty next year, make sure to enroll in coverage before the end of the current open enrollment period, February 15, 2015. To learn more about the health insurance options available to you, work with a licensed online agent like eHealth.
- Find out if you need to pay back some of your health insurance subsidies. If your modified adjusted gross income for 2014 fell below 400% of the federal poverty level (about $46,000 for a single person or $95,000 for a family of four), you may have qualified for and received government health insurance subsidies in 2014. Keep in mind that these subsidies were based on your estimated income for 2014. If your actual income in 2014 was more than expected and you did not adjust your subsidies mid-year, you may be required to pay some of all of those subsidy dollars back.
- Be aware of the higher bar for medical expense deductions – Here’s a change that’s been around for a year now but many people aren’t aware of it. Until 2012, you were able to itemize and deduct medical expenses in excess of 7.5% of your adjusted gross income. That threshold was raised to 10% beginning in the 2013 tax year, making it harder to claim this deduction. You can refer to IRS Publication 502 for more information about qualifying medical expenses, but these may include monthly premiums you pay for coverage (including some Medicare premiums), copayments, deductibles, dental expenses, and costs for some services not covered by your insurance plan. You may even deduct mileage accrued while driving to and from regular appointments. This deduction isn’t for everyone, but if you (or a family member) were seriously ill or hospitalized in 2014, you may still qualify.
- Get tax credits for providing employees with coverage. If you’re a small business owner providing group health insurance coverage for your workers, don’t forget that there may be special tax credits available to you. If you have 25 or fewer employees with average annual wages of less than $50,000, you may be eligible for a special tax credit of up to 50% of the amount you contribute toward employee insurance premiums. The credit went up to 50% starting in 2014; last year it was only 35%. Keep in mind that in order to qualify for the credit you must have paid at least fifty percent of your employees’ total monthly health insurance premiums.
- Fund your Health Savings Account (HSA) for 2014 – An HSA is a tax-advantaged savings account used in conjunction with an HSA-eligible health insurance plan. Account contributions, qualified distributions and earnings are all tax-exempt. An HSA allows you to deposit a portion of your pre-tax income into a savings account and use those funds to pay for qualified medical expenses. Unused money can be invested and accrue from year to year. If you have an HSA, be sure to deduct your contributions up to federally prescribed limits. Contributions to your HSA designated for 2014 and made before April 15, 2015 can be counted toward your 2014 federal taxes. HSA contributions for the 2014 tax year are capped at $3,300 for individuals and $6,550 for families. If you’re over age 55, you may qualify to make an additional $1,000 contribution for the year.
- Expenses for the care for an aging parent – If your elderly parent earned less than $3,950 in 2014 (excluding Social Security in most cases) and you provided more than half of his or her financial support, you may be able to claim your parent as a dependent. This earns you an additional dependent exemption, even if your parent doesn’t live with you. And if you’ve paid for the medical or nursing care of a dependent parent, you may also be able to itemize your costs as qualified medical expenses.
- Medicare premiums and medical home improvements – If you’re a retired senior, you may have an easier time meeting the 10% adjusted gross income threshold to deduct itemized medical expenses on your federal return. In addition to your out-of-pocket expenses for medical, dental or vision care, you may also be able to include capital expenses for the installation of home medical equipment or improvements to your property for wheel-chair access. In addition, premiums taken from your Social Security check to pay for Medicare Part B may qualify as deductible, as well as premiums you paid for Medicare Part D (Prescription Drug) coverage or a Medicare Supplemental plan.
Please note that the tips above do not constitute personal tax advice and eHealth recommends that consumers explore these issues with a certified public accountant or tax professional when completing their federal income taxes.