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If an individual pays for an exchange plan, how do they pay for the premium pre-tax as would someone with an employer plan?

January 7, 2021

Q. If an individual pays for an exchange plan, how do they pay for the premium pre-tax, the way they would if they had an employer-sponsored plan? This can be a substantial cost impact for the middle-class taxpayer who doesn’t qualify for the tax credit/subsidy. If you itemize, you do not get the full benefit that other taxpayers get. Am I missing something?

2019 Obamacare open enrollment guide

A. If you’re self-employed, you can generally deduct the full amount you pay in premiums without having to itemize your deduction. (Here’s more the self-employed health insurance deduction.)

But if you’re not self-employed, the only way to deduct your health insurance premiums is to itemize your deductions. You can only deduct your total medical expenses that exceed 7.5 percent of your AGI, although health insurance premiums count towards your total medical expenses. So as an example, if your AGI is $60,000 and your total medical expenses are $8,000 for the year (including health insurance premiums), you’d be allowed to deduct $3,500 in medical expenses as part of your itemized deductions on schedule A. (7.5 percent of $60,000 is $4,500, so you’re allowed to deduct the portion of your total medical expenses that exceeds $4,500).

Note that the medical expense deduction threshold used to be 7.5 percent of income; the ACA changed it to 10 percent, but it soon reverted to 7.5 percent and has remained at that level.

[The GOP tax bill that was enacted in December 2017 put the medical expenses deduction back to 7.5 percent, but only for 2017 and 2018. Then Section 103 of the Further Consolidated Appropriations Act, 2020, enacted in December 2019, kept that lower threshold in place for tax years 2019 and 2020. And finally, the Consolidated Appropriations Act, 2021 (Title I, Section 101) permanently reset the threshold at 7.5 percent, making it this deduction more accessible for more people going forward.]

The deductibility of health insurance premiums is an issue that has come up in health reform discussions many times over the years, and it’s undeniable that employees who must purchase their own health insurance are at a disadvantage tax-wise. Future legislation could change this, but for now, individual health insurance premiums are generally not deductible without itemizing unless you’re self-employed.

But if you qualify for a premium tax credit (the vast majority of exchange enrollees do), it will offset some or even all of the monthly premium you have to pay, putting you on much more equal footing with people who get employer-sponsored health coverage.

The post If an individual pays for an exchange plan, how do they pay for the premium pre-tax as would someone with an employer plan? appeared first on healthinsurance.org.

https://www.maddoxinsured.com/wp-content/uploads/2021/01/2-a.jpg 630 1200 wpmaddoxins https://www.maddoxinsured.com/wp-content/uploads/2020/12/maddox-insurance-agency.png wpmaddoxins2021-01-07 10:39:102021-01-08 14:30:49If an individual pays for an exchange plan, how do they pay for the premium pre-tax as would someone with an employer plan?

Can I deduct my exchange premiums when I file taxes?

January 7, 2021

Q. I’ve always had employer-sponsored health insurance, and the premiums were paid pre-tax. But I left that job last year, and have now purchased individual health insurance in the exchange. Do I get to deduct the premiums I’ve paid when I file my taxes?

open enrollment 2021

Our 2021 Open Enrollment Guide: Everything you need to know to enroll in an affordable individual-market health plan.

A. If you’re self-employed, yes. If not, it will depend on how much you spend on medical expenses during the year.

When you had employer-sponsored health insurance, your share of the premium was likely payroll deducted on a pre-tax basis, and thus your W2 reflected that fact. You did not have to deduct the premiums when you filed your taxes, because they were not included in the taxable income reported to you on your W2.

Now that you’re buying your own health insurance, there are several things to keep in mind:

  • If you’re self-employed, you’re allowed to deduct your health insurance premiums (note that you can only deduct the portion you pay, so if you receive a premium subsidy, you can only deduct the after-subsidy premium).
  • If you buy your own health insurance but you’re not self-employed, your premiums are only deductible as part of your overall medical expenses. The IRS allows you to deduct medical expenses that exceed 7.5% of your adjusted gross income, but you have to itemize your deductions to do so (the ACA had changed the threshold to 10 percent, but the GOP tax bill — H.R.1 — that was enacted in December 2017 returned the threshold to 7.5 percent for 2017 and 2018, the Further Consolidated Appropriations Act that was enacted in late 2019 extended that lower threshold through 2019 and 2020, and the Consolidated Appropriations Act, 2021 (a major COVID relief package) permanently set the threshold at 7.5 percent of income).Keep track of all your medical expenses throughout the year, as they can add up quickly. But if your total medical expenses don’t reach 7.5 percent of your income, you can’t take a deduction — and even if they do, you can only deduct the portion of the total medical expenses that exceeds the limit. Unfortunately, this puts non-self-employed people who buy their own health insurance at a distinct disadvantage compared with people who have employer-sponsored health insurance or who are self-employed. The ACA’s employer mandate only applies to businesses with 50 or more employees, so people who work for small businesses often find themselves having to purchase individual market health insurance. The same is true for seasonal employees and part-time employees who aren’t eligible for their employers’ health plans. Although individual market coverage is their only option, they have to pay their premiums with after-tax dollars (in many cases, however, they may be eligible for premium subsidies — ie, premium tax credits — to lessen the burden).
  • If you qualify for an income-based premium tax credit to lower your premiums, make sure that you continue to obtain your coverage through the exchange in your state. If you switch to an off-exchange plan, you wouldn’t be eligible for a subsidy to offset the cost of your coverage. If you buy your plan on-exchange and you’re eligible for a premium tax credit, you can either take it up-front, paid directly to your insurer each month (this is what most people do), or you can pay full price for your coverage each month and claim the full premium tax credit when you file your taxes (if you take the tax credit up-front, you’ll reconcile it on your tax return, and the total amount will be adjusted if necessary).
  • If you receive a subsidy to offset the cost of your health insurance premiums in the exchange, you cannot “double-dip” at tax time. In that case, if you’re self-employed or if your total medical expenses are high enough to allow for a deduction, you can only deduct the actual portion you paid, not the portion that was paid with the premium tax credit. Note that it can get a bit complicated if your premium deduction reduces your modified adjusted gross income and thus increases the amount of your subsidy … which in turn decreases the amount of your total premiums that you can deduct. The IRS has addressed this circular problem, and the details are here.

Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.

The post Can I deduct my exchange premiums when I file taxes? appeared first on healthinsurance.org.

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Resources

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  • Shelby County TN Business Tax Division

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