Federal Income Tax on Health Insurance

Allison Martin
IRS Form 1095-A Relating to Health Insurance

Before you begin tackling federal income tax issues associated with health insurance, you should first consider how the Affordable Care Act impacts taxpayers. It's also important to understand the criteria individuals and businesses must meet for their premiums to be deductible.

Affordable Care Act Considerations

The Affordable Care Act (ACA) mandates that you, your spouse and dependents carry qualifying health insurance throughout the year. Otherwise, you will incur a non-compliance penalty.

Does Your Plan Qualify?

In most instances, employer, individual, foreign, and government-sponsored programs meet the ACA requirements. However, some Medicaid programs do not meet the qualification criteria. The Internal Revenue Service (IRS) website provides a detailed minimum essential coverage chart to help determine if your plan qualifies.

How to Report Coverage

You should receive a copy of Form 1095-A (Health Insurance Marketplace Statement) at the beginning of each year that includes:

  • Coverage start and termination dates for each member of your household

  • Amount of monthly premiums

  • Amount of the premium tax credit

This form will also assist you in completing Form 8962 (Premium Tax Credit).

To show that your household was in compliance the prior tax year, simply check the box on the following pages of your tax return:

Exemptions

According to the IRS, you may be exempt from the ACA's individual shared provision policy if you meet the following criteria:

  • You are unable to afford the least expensive health insurance option available to you.

  • Your coverage gap does not span beyond three consecutive months in the calendar year.

  • You fail to meet the minimum income criteria for filing.

  • You are a non-citizen or U.S. citizen living abroad.

  • You are incarcerated.

  • You are experiencing a financial hardship.

  • You are covered under AmeriCorps.

A fee will be assessed when you file your tax return if you fail to carry the required minimum essential coverage.

To calculate your individual shared responsibility payment or determine if you're eligible for an exemption, use the interview tool provided by the IRS.

If you qualify for an exemption, complete Form 8965 (Coverage for Individuals Claimed on Your Return).

Premium Tax Credits

Did you purchase a plan through the Health Insurance Marketplace? If so, you may be eligible for a premium tax credit (PTC) if:

  • Your household income is between 100 and 400 percent of the federal poverty line.

  • You cannot be claimed as a dependent on another return.

  • You paid all your premiums.

To determine your eligibility, refer to the PTC Flow Chart use the online interview tool.

Are Health Insurance Premiums Deductible?

If you itemize deductions using Schedule A (Form 1040), you may be able to deduct the amount of premiums paid for medical or qualified long-term care expenses which are not covered under your employer's plan. However, the amount must be greater than 10 percent of your adjusted gross income (7.5 percent if 65 years or older and married). See Topic 502 for additional guidance.

By contrast, any health insurance premiums paid as income by the employer that are not included in Box 1 (Gross Wages) of your W-2 must be classified as taxable income, notes Intuit.

Business Owners

According to IRS Publication 535, you can deduct health insurance premiums for paid partners and S-Core employees who are shareholders if they own an interest greater than two percent.

Self-Employed Individuals

Self-employed individuals who report earnings on Schedule C, C-EZ or F and realize a net profit can deduct health insurance premiums.

Navigating the Tax Code

Connecting the dots between federal income taxes and health insurance can be difficult. However, a reputable certified public accountant who specializes in taxes should be able to help you navigate the components of the tax code which address health insurance.

Federal Income Tax on Health Insurance