Health Insurance Tax Tips You Need to Know
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 in 2013, 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, this year’s 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 in 2014.
Top Tax Tips for the 2013 Tax Year from eHealth
- Look out for new limits on medical expense deductions – Fewer people will be able to deduct medical expenses from their 2013 federal taxes. Up until 2012 you were able to itemize and deduct medical expenses in excess of 7.5% of your adjusted gross income. As a result of health reform, that threshold has been raised to 10% for the 2013 tax year. 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 one of your dependents) were seriously ill or hospitalized last year, 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 35% of the amount you contribute toward employee insurance premiums. Starting in the 2014 tax year, that credit will increase to 50%. Keep in mind that in order to qualify for the credit you must have paid at least fifty percent of your employees’ total monthly premiums.
- Fund your Health Savings Account (HSA) for 2013 – 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 2013 and made before April 15, 2014 can be counted toward your 2013 federal taxes. HSA contributions for the 2013 tax year are capped at $3,250 for individuals and $6,450 for families. If you’re over age 55, you may qualify to make an additional $1,000 contribution for the year.
- Big earners should look for new and increased Medicare taxes. When filing their federal taxes for 2013, joint-filers with incomes over $250,000 per year and single filer with incomes over $200,000 will face new and increased taxes as a result of the Affordable Care Act. There are two in particular to be aware of: First, the Medicare tax on earned income increases from 1.45% to 2.35% for income in excess of the $250,000/$200,000 limit. Second, big earners may face a new Medicare tax of 3.8% on interest, dividends, capital gains and rent and royalty income.
- Expenses for the care for an aging parent – If your elderly parent earned less than $3,900 in 2013 (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 of 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.
- Be aware of the 2014 tax year implications of health insurance subsidies. Consider this a tip for your 2014 tax-year return. If your modified adjusted gross income for 2014 falls below 400% of the federal poverty level (about $46,000 for a single person or $94,000 for a family of four), you may qualify for government health insurance subsidies. This is great if you need to buy coverage on your own. However, keep in mind that these subsidies are based on your estimated income for 2014. If you earn more than expected in 2014, you may need to adjust your subsidies mid-year or else repay all or part of your subsidies when you complete your 2014 federal tax return.
- Look out for the 2014 tax penalty for going uninsured. Here’s another forward-looking tip. In 2014 most Americans will be required to have health insurance in one form or another. If you don’t have employer-based coverage and are not enrolled in Medicare or Medicaid, and you don’t otherwise qualify for one of the exceptions provided by the law, you may be required to purchase coverage on your own. If you don’t – and if you’re uninsured for more than three consecutive months in 2014, you may trigger a tax penalty on your 2014 federal tax return. The penalty, which will be applied on your 2014 federal tax return, is $95 or 1% of your income, whichever is greater. Penalties will increase in succeeding years. In order to avoid the penalty for 2014, be sure to enroll in coverage before the end of the nationwide open enrollment period, which runs through March 31, 2014. Enroll in a 2014 plan through a licensed online agent like eHealth or through your state’s government health insurance exchange.
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.