As healthcare costs continue to escalate, more consumers are searching for ways to minimize expenses through tax breaks – one such method being deducting their health insurance premiums.
But are Obamacare premiums tax deductible? The answer depends on your income and type of coverage; here are some tips that may help you determine if deducting them makes sense for you.
What is the Affordable Care Act?
The Affordable Care Act (ACA) is a health insurance reform law passed by Congress and signed into law by President Obama in March 2010. It includes reforms designed to increase healthcare quality while lowering costs and protecting consumers against abuse by insurers.
Insurance providers cannot deny or charge more for coverage to those with preexisting conditions, and it ensures you get maximum value from your premium dollar by mandating that at least 80% of it be spent on medical services rather than overhead, advertising, and executive bonuses.
ACA also mandates that employers provide healthcare coverage or face penalties, with individuals who purchase their own insurance qualifying for premium tax credits either immediately or reconciled on their taxes to help cover costs of coverage. Premiums paid to employers typically do not qualify, however, because these are pretax payments so would double deduct from one’s taxes.
Who is eligible for Obamacare?
Employer-provided health insurance premiums may be excluded from an employee’s income if they’re part of an IRS-approved cafeteria plan, while employees who itemize deductions and have medical expenses that exceed 7.5% of their adjusted gross income can deduct individual health coverage costs on their taxes.
Individuals eligible for Obamacare premium tax credits if their annual household income falls within 400% of the poverty level can apply through either their state’s health insurance marketplace or directly with New York State of Health during either an open enrollment period or special enrollment periods for specific life events.
However, these subsidies are only available for plans purchased from the Marketplace or individual market that comply with ACA-compliant policies; COBRA insurance or any supplementary forms of health coverage such as hospital indemnity coverage or critical illness insurance may not qualify for premium subsidies; also only individuals enrolling in marketplace-based plans of silver level or higher qualify for these premium subsidies.
How do I qualify for Obamacare?
Most individuals eligible for subsidies typically sign up during the open enrollment period to ensure coverage begins by January. They often take out premium tax credit in advance and it is paid directly to their health insurer each month as an offset against monthly costs; any excesses are reconciled back when filing taxes (although starting in 2022 advance payments were no longer required to return any subsidies).
Keep in mind that Affordable Care Act subsidies only apply to marketplace plans and don’t work with employer-sponsored coverage or Medicare. Furthermore, poverty guidelines and thresholds often change every year; to qualify for premium tax credits a household’s income must fall below 400% of their state’s poverty guideline and their household size/state’s specific poverty guideline threshold varies accordingly. Individuals experiencing changes to their income during the year should report it directly to their marketplace so as to receive adequate assistance.
Are Obamacare plans affordable?
Health plans offered on the Affordable Care Act marketplace vary in cost; typically between $328 and $482 monthly before Premium Tax Credits are applied, which reduce the overall premium cost for people earning below 400% of poverty level.
However, many are finding the cost of Obamacare too prohibitive even with subsidies; this has resulted in an enrollment drop and many are opting to pay the penalty instead of signing up for coverage.
Mortgage underwriter Irene Solesky and her husband earn too much income to qualify for subsidies, forcing them to pay $1,351 monthly for a CareFirst bronze plan with a $13,100 family deductible.
If you become unemployed or self-employed, COBRA allows you to maintain the same health coverage provided by your previous employer. Private plans can also be purchased outside the open enrollment period but won’t qualify for subsidies or deduction from taxes.