How Does Health Insurance Affect Your Taxes?

how does health insurance affect taxes

Health insurance coverage can majorly impact your taxes and finances throughout the year. The source of your insurance also affects your tax return. 

For example, if your healthcare plan is provided by your employer, the portion of the plan you cover is deducted from your paycheck, but it’s not included in your taxable income. You’ll receive Form 1095-C to complete your taxes at the beginning of the following year.    

But, if you’re self-employed or your employer doesn’t offer health insurance, you can purchase a policy through the marketplace at Luckily, there are tax breaks designed to help you save money on your health insurance premium – keep reading for more details on health insurance and how it affects your taxes.  

Health insurance tax credit: Who qualifies? 

The Premium Tax Credit (PTC) makes health insurance more affordable for people buying coverage through the marketplace. The credit is typically distributed throughout the year from your insurance provider; you’ll then account for this on your tax return. The credit is based on a sliding scale using information such as your income, family size, and other requirements to determine your eligibility. 

Special provisions for tax years 2021 – 2025 

  • If your household income exceeds 400% of the Federal Poverty Line (FPL) for your family size, you can claim the PTC. 
  • Households with incomes that exceed 400% of the FPL are required to contribute 8.5% of their income to the benchmark plan (Second Lowest Cost Silver Plan). 
  • Households with a combined income of less than 150% of the FPL do not have to pay premiums for the benchmark plan. In some states, you may have to pay a small fee due to additional state-mandated benefits. View the table below to determine how much you must pay for your healthcare plan. 

Required contribution to the benchmark plan premium for 2024 

Household income range (% of the FPL) Required % of household income at the top of the range Required % of household income at the top of range 
Less than 150% 0% 0% 
150% – 200% 0% 2% 
200% – 250% 2% 4% 
250% – 300% 4% 6% 
350% – 400% 6% 8.5% 
Above 400% 8.5% 8.5% 

To claim the credit, use Form 1095-A which you will receive in the mail to complete Form 8962 when you file your tax return. You’ll use this form to reconcile the difference between the actual value of the premium tax credit (based on the requirements listed above) and any advance payments you received throughout the year. 

Tax penalty for no health insurance 

The American Healthcare Act required all Americans to have health insurance. If you didn’t enroll in a healthcare plan, you’d face a fine at tax time. This tax penalty was lifted in 2018, so you won’t have to deal with a tax bill for not having health insurance. 

Although you’re not required to have health insurance, it can provide significant savings on medical bills throughout the year. The health insurance marketplace offers plans with different premiums to fit your budget. 

Health insurance tax deductions 

If you’re self-employed and/or purchase health insurance through the marketplace, you may be eligible to deduct up to 100% of the cost of health insurance if you meet one of the following requirements: 

  • You’re reporting a net profit for the year using Schedule C or Schedule F.  
  • You’re a general partner or a limited partner receiving guaranteed payments  
  • You’re a shareholder owning more than 2% of an S corporation with wages from the corporation reported on Form W-2. 

For more information on deducting health insurance costs as a self-employed worker, read Health Insurance Deduction for the Self-Employed. 

If you’re not self-employed, you can deduct up to 7.5% of unreimbursed medical expenses on your federal return if you itemize your deductions. More than half of U.S. states allow taxpayers to deduct medical and dental expenses from their state tax returns. For more information, read Tax Deductions for Medical and Dental Expenses. 

Filing taxes while on Medicaid 

Medicaid programs are administered by the states and pay medical bills with state and federal tax money. This means you’ll need to account for Medicaid payments on both your state and federal tax returns.  

You’ll use Form 1095-B to document your healthcare coverage on your federal return. Your state return may require additional paperwork, to document Medicaid payments. Contact your state’s department of revenue for more information.  

Need more help? TaxSlayer can walk you through each step of the filing process. File fearlessly knowing your tax return is 100% accurate and you’re receiving your maximum refund guaranteed!  

Health insurance tax benefits 

Along with health insurance, a Health Savings Account (HSA) or Flexible Spending Account (FSA) can provide extra savings on healthcare costs. These accounts pull pre-tax dollars into a savings account for use toward certain out-of-pocket medical expenses, like copays. While these accounts have similar names, their functions differ slightly.  

An FSA is like a line of credit, so if you go over the limit, you’ll have to cover the difference before the end of the year. If you have leftover money in the account at the end of the year, this money disappears. So, if you don’t use it, you lose it! 

An HSA is just that, a savings account you can pull from whenever you need it. This money rolls over if you have a balance at the end of the year. Keep in mind, you can only use the money you’ve already saved. 

FAQs about health insurance and taxes 

Health insurance coverage has different implications for your taxes depending on the type of coverage and your AGI. Get answers to some of your common questions about health insurance and taxes here! 

Why do I owe taxes for health insurance? 

You may owe taxes for health insurance if you used more of the premium tax credit than you qualified for. You’ll have to report the excess amount on your 1040 using Form 8962. For tax year 2020 only, you are not required to attach Form 8962 to your 2020 tax return due to COVID-19 provisions. 

Do health insurance premiums reduce taxable income? 

Health insurance premiums can potentially reduce your taxable income. Health insurance premiums are tax deductible if you itemize deductions and if you qualify for this specific deduction. 

Does health insurance affect taxable income? 

Health insurance does not directly affect taxable income, but if you deduct your health insurance premiums, it can reduce your taxable income. Contributing to an HSA or FSA also reduces your taxable income. 

How does the IRS know if you have health insurance? 

The IRS will know you have health insurance if you use a 1095 to file your taxes. If you don’t have health insurance, you will not be penalized by the IRS. 

How does not having health insurance affect your tax return? 

Not having health insurance has no impact on your tax return and tax bill for tax years 2018 and newer. But prior to 2018, you were penalized for not having coverage. 

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