Warning Medical Insurance and Taxes Don’t Have to Cause Ulcers
Medical insurance and taxes are just one more area that makes Tax Reform confusing. We want to clear up some questions you may have about the Affordable Care Act’s changes here.
Uninsured Penalty
The Affordable Care Act (ACA) put significant penalties on taxpayers and their families who do not have ACA-compliant health insurance. Even though the tax reform took out these penalties after 2018, they still apply for this year. And, they can be as high as the greater of $2,085 or 2.5% of the family’s household income. So, all taxpayers must carry medical insurance. Unfortunately, it is one of your largest expenses. While the penalty will go away in 2019, you must understand how to handle the health insurance expense for tax purposes. This is so you can get the most tax benefits possible.
Employer Plans
Employer Health Insurance
When it comes to medical insurance and taxes, read on. The following applies to an employer with 50 or more full-time-equivalent employees. That employer must offer affordable health care to their full-time employees. When they don’t, they are subject to federal penalties.
Payment of premiums is not mandatory by the business. The business must only provide access to the insurance. Many companies pay for health insurance as part of their employees’ compensation packages. This is true even those companies with fewer than 50 full-time equivalent employees. 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 are eligible to be an above-the-line health insurance deduction. This is under certain conditions and discussed below. However, don’t include in your medical expenses any insurance premiums paid by an employer-sponsored health insurance plan. This is unless the premiums are included as taxable wages on your Form W-2.
Health Reimbursement Plans
Employer Health Reimbursement Arrangements or HRAs are distributions an employee receives. Gross income excludes an HRA. Whenever income excludes an item, a taxpayer cannot also take a tax deduction for the same item. This is because it would result in a double benefit, both exclusion from income and a deduction. Thus, health insurance premiums paid with funds from an HRA are not deductible.
Self-Employed Health Insurance Deduction
Self-Employed Health Insurance Deduction refers to a self-employed individual. This taxpayer is able to 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, their spouse and dependents. This includes partners or more-than-2% shareholders of an S corporation.
The deduction cannot exceed the self-employed individual’s net earnings from self-employment. They are subject to the following:
Corporate Health Insurance Deduction
For a more-than-2% S corporation shareholder, the deduction cannot be take. That is unless the amount paid for the insurance by the S corporation is included in the shareholder’s wages from the S corp. 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. An example is when a health insurance policy is subsidized, but the long-term care policy is not. Here the premiums for the qualified long-term care policy would still be deductible up to the maximum allowed. This is based on the taxpayer’s age. The term “subsidized” means 50% or more of the cost of the coverage is paid by the employer.
Above-the-Line Deductions
Here is something to consider when it comes to medical insurance and taxes. When you claim health insurance premiums as an above-the-line self-employed health insurance deduction, you cannot claim 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.
Itemized Deductions
Medical Itemized Deductions
Here is another area that relates to medical insurance and taxes. Itemized medical deductions, including medical insurance, are only for 2018. That is to the extent that the total medical expenses exceed 7.5% of a taxpayer’s adjusted gross income (AGI). For example, your AGI for 2018 is $30,000, the medical expenses that are 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. Those allowed are:
- Medical
- Hospital
- Dental
- Long-term care (age is the factor that limits what is allowable as a deduction)
- Lost or damaged contact lenses
- Prescription drugs and insulin
- Medicare-B
- Medicare-D, and
- Supplemental Medicare insurance premiums.
The health exchange allows for the deduction for insurance premiums minus the premium assistance credit. Another term for the health exchange is the Health Insurance Marketplace.
Don’t Get Sick Because of Medical Insurance and Taxes
If you have additional questions related to health and medical insurance deductions – or any tax issue, for that matter – please call Alex Franch, BS EA a call at 781.849.7200 or email us at contactus@worthtax.com. You may also make an appointment at any one of our locations in Dedham, Weymouth, and Norwell to work on your tax planning strategy.
Alex Franch, BS EA
Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning.
Sources and Resources for Health Insurance and Taxes
- Year-End Tax Planning is Not Business as Usual; Things You Need to Know # 2
- Year-End Tax Planning Is Not Business as Usual; Things You Need to Know Part 1
- Reduce Employee Burnout in Your Small Business
- Daycare Providers Meals Allowance: Enjoy Tax Benefits
- Day Care Providers Business Home Use
- After Tax Reform, What’s Best for Business Owners: S Corp or C Corp?
- Proposed New IRS Tax Form 1040 Breakdown
- Avoid Most Common Accounting Mistakes Small Business Owners Make
- Home Office Tax Deduction Good or Bad?
- Employee Business Expenses: Tax Reform Suspends Tax Deduction
- Preparing Taxes for 2018 and Beyond
- What Makes a Great CEO?
- Cryptocurrencies and Taxes
- New Tax Law Severely Limits Entertainment Deductions
- 9 Best Ways to Start a Business Budget to Spur and Guide Growth
- How Small Businesses Write Off Equipment Purchases
- 2018 Mileage Rates for Businesses
- IRS Accountable Plans Tax Map
