In an effort to keep health insurance premiums more affordable, switching policies has become practically an annual event. This is true with many employer-sponsored plans, but you might even make a switch with an individual plan. Chances are, you began 2018 with a new health insurance plan, and you may even do the same for 2019.
What effect will new health insurance mean for your taxes?
It all depends on what type of plan you’ve selected, as well as whether or not you have an employer-sponsored plan or an individual plan. But despite the tax reform law passed at the end of 2017, basic tax rules for health insurance premiums will be the same in 2018 as they were in 2017.
A New Employer-Sponsored Health Insurance Plan
One of the basic advantages of having an employer-sponsored health insurance plan is that the premiums are typically paid pre-tax so they reduce your taxable income. For example, if you earned $50,000 in salary from your employer, and contributed $5,000 toward your health insurance premium, your income for federal tax purposes will be reduced to $45,000.
If you’re in the 12% tax bracket for 2018, this will result in a $600 reduction in your federal income tax. That doesn’t come close to offsetting the cost of your contribution, but it gives you some tax relief.
With most plans, the employer pays part of the premium. That portion of the premium will have no tax consequences for the employee either way.
A New Individual Health Insurance Plan
If your employer doesn’t provide a health insurance plan, you can get coverage either on your state health insurance exchange or on healthcare.gov by the December 15th open enrollment deadline.
If you have to go this route, there are two ways you may get a tax break.
Health insurance premium tax credit: If you purchase health insurance in your state marketplaces or healthcare.gov, you could get the premium tax credit (PTC) to help you pay for health insurance. There are are a series of eligibility criteria but the main one is based on your income. To be eligible, your household income must be at least 100% but not more than 400% of the federal poverty level.
Claim the premiums as an itemized deduction: To the extent your premiums exceed 7.5% of your adjusted gross income, you can claim them as an itemized deduction. For example, if your adjusted gross income for 2018 is $100,000, and you paid $20,000 in health insurance premiums, you’ll be able to deduct $12,500 of that amount. That’s calculated by $20,000 – ($100,000 X 7.5%).
However, under the new tax law, the standard deduction was increased to $12,000 for single filers and $24,000 for those married filing jointly. That is a much higher bar than in previous years, so you may no longer benefit from claiming the standard deduction unless you have enough other itemized deductions to bump you over the new standard deduction thresholds.
If you are self-employed you can deduct your health insurance premiums paid and you don’t have to itemize your deductions or be subject to the 7.5% requirement.
Impact of a Health Savings Account (HSA)
You may be considering a Health Savings Account, given that health insurance deductibles have increased in recent years. They can partially offset the health insurance premium cost. A typical deductible is now several thousand dollars, whether on an ACA policy or an employer-sponsored plan. An HSA can help you build up cash reserves to cover a high deductible and you get a tax break on your contributions.
When first introduced, HSAs were designed for plans with high deductibles.
For 2018, individuals can contribute up to $3,450, or $4,450 if you are 55 or older. Families can contribute up to $6,900, or up to $7,900 if you are 55 or older.
There are also specific limits on both the deductibles and out-of-pocket maximums on your basic health insurance. HSAs are an excellent way to balance higher deductibles and out-of-pocket costs with a reduced cost basic health insurance premium. If you make a maximum family contribution of $6,900, and you’re in the 22% tax bracket, you’ll save $1,518 on your federal income tax bill for 2018.
Don’t forget if you have money left in your HSA at the end of the year to use it by December 31, as some accounts are “use it or lose it” or will let you roll over $500 into the following year.
What Happened to the ACA Penalty
Under the new tax reform law the ACA tax penalty was eliminated beginning with 2019 taxes filed in 2020, but if you could afford health insurance in 2018 and didn’t buy it you may be subject to the tax penalty.
Even though the penalty still applies, there are several exceptions, including:
- The lowest-priced coverage available to you in 2018, through either a Marketplace or job-based plan, would cost more than 8.05% of your household income.
- You don’t have to file a tax return because your income does not meet the income tax filing requirement.
- You had a financial hardship or other circumstances that prevented you from getting health insurance.
- You were uninsured for no more than two consecutive months of the year.
- You lived in a state that didn’t expand its Medicaid program and your household income was below 138% of the federal poverty level.
Those exceptions should allow most taxpayers to avoid the ACA tax penalty for 2018. And once again, the penalty will disappear beginning in 2019, and subsequent years.
Don’t worry about knowing these tax laws. TurboTax will ask you simple questions and give you the tax deductions and credits you’re eligible for based on your answers. If you have questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent to get your tax questions answered. A TurboTax Live CPA or Enrolled Agent can also review, sign, and file your tax return.