How health insurance can affect your taxes

This article was fact-checked by our editors and reviewed by Christina Taylor, MBA, senior manager of tax operations for Credit Karma and has been updated for the 2018 tax year.

Buying health insurance affects your taxes. So does not buying it.

Whether you get your health insurance through an employer or the Health Insurance Marketplace, it’s important to understand how health insurance affects taxes so that you’re better prepared to file your tax return.

When the Affordable Care Act (ACA) was enacted in 2010 , the law made health insurance more widely available for some people. But it also made things a little more complicated for some during tax season.

How does health insurance affect taxes?

Where you get your health insurance from can make a big difference in its effect on your tax return.

Employer-sponsored health insurance

If your employer offers health insurance as a benefit and you pay a portion of the plan’s premium, your part of the bill is paid with pre-tax dollars . This means the amount isn’t subject to withholdings for federal or state income tax, or Social Security and Medicare taxes .

The amount of federal and state income taxes withheld can depend on your income and how many allowances you claim on your W-4 form. As of 2017, the total Social Security and Medicare tax rate is 15.3 percent. Your employer must pay half of that, so you’ll see 7.65 percent automatically withheld from each paycheck.

The health insurance exchange

If your employer doesn’t offer a health insurance plan or you’re self-employed, you can get a health insurance policy through HealthCare.gov.

Depending on your income level, you may qualify for the premium tax credit to help offset the cost of your monthly premiums. The amount of the credit is on a sliding scale , and you may be eligible if your household income for the year is at least 100 percent but no more than 400 percent of the federal poverty line for your family size.

“You can elect to have the federal government pay a portion of the insurance premiums upfront, or you can get the subsidy when you prepare your return ,” says Jeffrey Schneider, an enrolled agent and certified tax resolution specialist. In order to get an upfront payment, you must estimate your income for the year you want coverage.

Since it can be hard to estimate future income, you might get more advance payments than you qualify for. If so, you would have to pay back the difference when you file your federal income tax return. Healthcare.gov provides guidance on estimating your expected household income.

If you’re self-employed, you may also be able to deduct the amount your paid for health insurance for you, your spouse and your children.

What is the tax impact of not having health insurance?

If you can afford health insurance and do not fall under one of the exemptions that allows you to forego buying it, you must have health insurance that meets the requirement under the ACA, Schneider notes. If you don’t, you may be subject to a penalty (sometimes called the “shared responsibility payment”) in 2018.

That penalty can be calculated based on a percentage of your household income or per person in your household. You can use an online calculator to determine your penalty. The Tax Cuts and Jobs Act of 2017 reduced the amount of the penalty to zero for tax years beginning after Dec. 31, 2018.

How to maximize your health insurance tax benefits

If your employer offers a health insurance plan, you’ll likely get the most savings there between taxes and monthly premiums. Additionally, check to see if your employer plan comes with a Health Savings Account (HSA) or Flexible Spending Account (FSA) to further maximize your tax benefits.

Health Savings Account

An HSA account allows you to set aside pre-tax money to use for qualified healthcare expenses, but you can only contribute to an HSA if you have a high-deductible health plan .

As of 2017, your health insurance plan qualifies as a high-deductible health plan if your deductible is at least $1,300 for an individual and $2,600 for a family. Additionally, the plan’s total out-of-pocket expenses can’t be more than $6,500 for an individual and $13,100 for a family for in-network services.

Note that you can also qualify for an HSA if you get your health insurance through the Health Insurance Marketplace .

The interest that you earn in an HSA is tax free, and so are the disbursements. Additionally, funds roll over from year to year, so you don’t have to worry about them expiring.

Flexible Spending Account

Similar to an HSA, an FSA allows you to set aside money from your paycheck pre-tax to pay qualified medical expenses. There are, however, a few differences:

• You set up an FSA plan at the beginning of the year and must use the funds during that year. You lose any money left in the FSA at the end of the year.
• The full amount of the FSA plan is made available at the beginning of the year, and you make payments into the plan throughout the year.
• You don’t have to have a high-deductible health plan to qualify, but you cannot have an HSA and FSA at the same time.
• If you leave your job, you lose your FSA. On the flip side, an HSA goes with you .

Bottom line

If you don’t have health insurance, you may take a hit when you file your tax return. If you don’t have access to health insurance through your job, the Health Insurance Marketplace can help you compare eligible health plans in your state. That way you can take advantage of some of the tax breaks designed for you.

If you’re just learning how to file taxes, the tax impact of health insurance can be complicated.

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.