How tax reform could affect your healthcare spending and taxes

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

Tax reform overhauled many aspects of the tax code, but it’s impact reaches far beyond your tax return.

Much of the news surrounding tax reform has focused on big changes to how personal and corporate income is taxed. But the tax reform law contains other important modifications as well. Several changes could directly impact healthcare, how much you’ll pay to get it, and how your healthcare spending will affect your taxes.

Tax reform’s effect on your healthcare spending will depend on whether you have insurance, how you get covered, and the percentage of your income devoted to covering care costs.

Here are big changes from tax reform you need to know about for your healthcare spending.

A lower threshold for medical expense deduction

Taking care of your health isn’t cheap. According to polls by the Kaiser Family Foundation, more than a quarter of Americans say they’ve put off getting health services they need due to the cost of care. And 29% have trouble paying medical bills, with seven in 10 of the strugglers cutting back spending on food, clothing or basic household items in order to cope.

Prior to tax reform, you could deduct qualifying medical expenses if the total cost exceeded 10% of your adjusted gross income (AGI). Tax reform lowered the threshold to 7.5% of your AGI. The change is retroactive for your 2017 taxes. However, the threshold reverts to 10% of AGI on Jan. 1, 2019.

There is a catch: To take a medical expense deduction, you must itemize your deductions to reduce your taxable income. Since tax reform almost doubled the standard deduction starting in 2018, some people might be less inclined to itemize deductions. In that case, they won’t get to take advantage of the lower threshold for deducting medical expenses.

No more individual mandate

The Patient Protection and Affordable Care Act (also known as “Obamacare” or the “ACA”) required all taxpayers to have health insurance that met the act’s standards for minimum essential coverage — or face a penalty.

Under the ACA, taxpayers can face a penalty equal to the greater of 2.5% of household income (with a maximum penalty equal to the total yearly premium for the national average price of a Bronze plan sold through the Marketplace) or $695 per uninsured adult and $347.50 for each uninsured child younger than 18, with a maximum penalty of $2,085. This penalty was required unless uninsured taxpayers met specific requirements for exemption, such as financial hardship or being homeless or a victim of domestic violence.

Tax reform effectively repealed the individual mandate by setting the penalty amount to zero beginning Jan. 1, 2019. The penalty still applies for the 2017 and 2018 tax years though, so you could be charged if you went without coverage last year or don’t have it this year. If you don’t have coverage in 2019 though, you won’t have to pay that penalty when you file your 2019 income taxes in 2020 — provided Congress doesn’t change the law again in the meantime.

Tax reform could increase health insurance costs

Avoiding a tax penalty for not having insurance may seem like a good deal to those who don’t want coverage, but the tax reform impact on healthcare may make insurance policies more expensive for those who do want to purchase health coverage.

The Congressional Budget Office analyzed the impact of repealing the mandate. The CBO concluded that average premiums for policies offered to individuals would increase by an estimated 10% almost every year in the upcoming decade, relative to previous projections for the ACA. The CBO predicts that repealing the individual mandate will mean healthy individuals are less likely to buy insurance, which will cause premiums to increase.

This could mean that if you don’t have access to group coverage through an employer — if you’re self-employed, for example — you may find your premiums increasing significantly post-tax reform.

Bottom line

Tax reform’s impact on healthcare could be mixed for taxpayers.

Some taxpayers may avoid a penalty for not having health insurance starting in 2019. However, those who still want to buy individual coverage will likely face higher premiums.

Meanwhile, some taxpayers will be able to take advantage of the medical expense deduction thanks to the lower AGI threshold. However, they may end up passing on the opportunity if the higher standard deductions make itemizing less appealing to them.

Taxpayers will need to determine whether itemizing deductions or taking a standard deduction will give them the greater tax benefit.

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.