Health insurance and income taxes may seem like two very different subjects. But in fact, they impact one another in several very important ways. The more you understand how this works, the better you can plan for both tax and insurance costs. Here are five key things you need to know.
1. Adjusted Gross Income Affects Individual Coverage
If you don't get insurance through your employer, you may turn to the individual health insurance marketplace. And your Adjusted Gross Income (AGI) has much to do with whether or not you qualify for government subsidies for insurance. Some taxpayers may be able to use legitimate planning methods to target their AGI to avoid going over certain thresholds.
2. Employer-Based Insurance Is Often Nontaxable
Most taxpayers who receive insurance through their employer can sign up to have premiums deducted through their paycheck from either before-tax income or after-tax income. While the first option is the least work — the employer will report taxable wages for you — the second gives you further choices to use this cost on your tax forms. You may, then, need to plan in advance the best way to deploy this deduction.
3. Other Health Coverage Options Are Tax-Free
Two popular methods to pay for health insurance premiums, co-pays, and uncovered expenses offer tax benefits. Health Savings Accounts and Flexible Spending Accounts can be opened by those with high deductible coverage and are funded by the account owner and/or their employer. Amounts contributed reduce your taxable income, but you will need to complete reconciliation forms each year with Form 1040.
4. Entrepreneurs Have Additional Deduction Options
Do you have a side gig of any kind? Then you may be able to deduct health insurance premiums for yourself, your spouse, and your dependents at tax time. If you buy individual insurance, you may deduct it as an adjustment to income. However, if insurance is deducted from a paycheck before taxes are calculated, avoid 'double dipping' by claiming them as a deduction twice.
5. Uncovered Health Care May or May Not Be Deductible
Finally, anyone who has large medical expenses in a year should track these for potential use as an itemized deduction if these exceed 7.5% of your income. However, due to the rise in standard deduction amounts, this deduction is used less than in prior years. So if you expect or encounter a lot of unreimbursed medical costs in a year, consult your tax preparer to learn more about deducting them.
Where to Start
Health insurance clearly affects your tax bill in many ways. Some of these can be complex to claim and you must adhere to a variety of rules to do so. The best place to find out more is to meet with an experienced tax service in your area. Make an appointment today to start tax planning for both your health and your finances.