The Affordable Care Act (ACA) imposed significant penalties on taxpayers and their families who do not have ACA-compliant health insurance. Even though the tax reform removed these penalties after 2018, they still apply for this year and can be as high as the greater of $2,085 or 2.5% of the family’s household income. So, just about everyone is being forced to carry medical insurance, and it is probably one of your largest expenses. Even though the penalty is going away in 2019, it is important to understand how the health insurance expense is handled for tax purposes so you can get the most tax benefits possible.
Employer Health Insurance – If an employer has 50 or more full-time-equivalent employees, the employer is required to offer affordable health care to their full-time employees or else the business will be subject to federal penalties. The business is not required to pay the premiums, just provide access to the insurance. Many companies, even those with fewer than 50 full-time equivalent employees, may pay for health insurance as part of their employees’ compensation packages. You may deduct any portion of the health coverage premiums you pay as a medical itemized deduction, or if you or your spouse are self-employed, the premiums you pay may be an above-the-line health insurance deduction under certain conditions, as discussed below. But don’t include in your medical expenses any insurance premiums paid by an employer-sponsored health insurance plan unless the premiums are included as taxable wages on your Form W-2.
Employer Health Reimbursement Arrangements (HRAs) – Distributions received by an employee under an HRA are excluded from gross income. Whenever an item is excluded from income, a taxpayer cannot then also take a tax deduction for the same item because that would result in a double benefit – both exclusion from income and a deduction. Thus, health insurance premiums paid with funds from an HRA would not be deductible.
Self-Employed Health Insurance Deduction – A self-employed individual, including partners or more-than-2% shareholders of an S corporation, can deduct as an above-the-line expense 100% of the amount paid during the tax year for medical insurance on behalf of the self-employed individual and his or her spouse and dependents, subject to the following:
- The deduction cannot exceed the self-employed individual’s net earnings from self-employment.
- For a more-than-2% S corporation shareholder, the deduction cannot be taken unless the amount paid for the insurance by the S corporation is included in the shareholder’s wages from the S corporation.
Also, no deduction is available for any month during which the self-employed individual was eligible to participate in a “subsidized” health plan maintained by an employer of the taxpayer, the taxpayer’s spouse, any dependents, or any child of the taxpayer who did not attain age 27 as of the end of the tax year. This rule is applied separately to plans that provide coverage for qualified long-term care services. For example, if a heath insurance policy is subsidized but the long-term care policy is not, the premiums for the qualified long-term care policy would still be deductible up to the maximum allowed, based on the taxpayer’s age. The term “subsidized” means 50% or more of the cost of the coverage is paid by the employer.
If health insurance premiums are claimed as an above-the-line self-employed health insurance deduction, they cannot also be claimed as a medical itemized deduction. However, an above-the-line deduction is always the better choice, since it avoids the income-based limitations imposed on itemized medical deductions.
Medical Itemized Deductions – Itemized medical deductions, including medical insurance, are only allowed for 2018 to the extent that the total medical expenses exceed 7.5% of a taxpayer’s adjusted gross income (AGI). For example, if your AGI for 2018 is $30,000, then only medical expenses in excess of $2,250 (7.5% of $30,000) will be deductible; of course, your total itemized deductions must exceed the standard deduction. For 2019 and future years, the 7.5% amount will increase to 10%, further limiting medical deductions.
Deductible Medical Insurance – To get the maximum out of your medical insurance premium deductions, please take the time to review this list of possible types of coverage that are allowed: medical, hospital, dental, long-term care (limited to what is allowed as a deduction based on your age), lost or damaged contact lenses, prescription drugs and insulin, Medicare-B, Medicare-D and supplemental Medicare insurance premiums. The deduction for insurance premiums for coverage acquired through a health exchange (the Health Insurance Marketplace) is allowed, minuf the premium assistance credit.
Contact Charles Woodson if you have additional questions related to health and medical insurance deductions – or any tax matter.
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