The Impact of Health Insurance on Your US Taxes for American Expats
When you think about health insurance, taxes might not be the first thing that comes to mind. However, the connection between the two is more significant than many realize. The Patient Protection and Affordable Care Act (ACA) of 2010 brought about several changes to the U.S. tax code. These changes continue to affect individuals who purchase health insurance through the healthcare exchanges. Let’s break down what this all means for you today.
The Individual Mandate and Shared Responsibility Payment
In 2014, the ACA mandated that U.S. citizens and legal residents must have minimum essential health care coverage or qualify for an exemption. If they don’t, they must pay a penalty, known as the Individual Shared Responsibility Payment, when filing their tax returns. Initially, the penalty was the greater of $95 or 1% of household income above the tax filing threshold. The penalties increased over the next few years, reaching $695 or 2.5% of income by 2016, whichever was higher.
However, in 2019, the Tax Cuts and Jobs Act of 2017 eliminated the federal penalty by reducing it to $0. Despite this change at the federal level, some states have implemented their own individual mandates with associated penalties. States like California, Massachusetts, and New Jersey still require residents to maintain health insurance coverage or pay a state-level penalty.
Premium Tax Credit
The Premium Tax Credit is a refundable credit that helps eligible individuals and families afford health insurance purchased through the Health Insurance Marketplace. To qualify, your income must typically be between 100% and 400% of the federal poverty level (FPL). However, the American Rescue Plan Act (ARPA) of 2021 temporarily expanded eligibility. It removed the 400% FPL cap for the 2021 and 2022 tax years.
In addition, ARPA increased subsidies for those who received unemployment compensation during 2021. This change effectively made many eligible for maximum subsidies. The Inflation Reduction Act extended these enhanced subsidies through 2025. This means more people will continue to receive help paying for their health insurance premiums through the Marketplace. The calculation for the Premium Tax Credit also remains more generous.
TIP: If you’re close to the Premium Tax Credit threshold, consider contributing to a retirement or Health Savings Account account. These contributions can lower your taxable income and increase your credit eligibility.
Reporting Changes to the Health Insurance Marketplace
You must report any changes in your income and family size to the Health Insurance Marketplace as they occur. Changes you should report include an increase or decrease in income, marriage or divorce, birth or adoption of a child, getting or losing other coverage, and moving to a new address. These changes will adjust your premium tax credit accordingly. This way, you won’t need to repay the funds or miss out on expected tax-saving opportunities when you file your taxes.
Failure to report changes might result in getting the advance payment of your premium tax credit wrong. If your actual annual income turns out to be higher than you estimated, you may need to pay back some or all of the additional credit when you file your tax return. On the other hand, if your income decreases or you acquire a new dependent, you could become eligible for more credit, further reducing your monthly premiums or increasing your tax refund.
Other changes, like losing other coverage or adding a dependent, may also allow you a Special Enrollment Period. This allows you to make changes to your health insurance outside of those standard open windows, usually with a grace period lasting 60 days after the change in circumstances.
When you file your taxes, you must reconcile the premium tax credit by comparing the advance credit you received with the amount you were eligible for based on your final income. You’ll use IRS Form 8962 to do this. Any discrepancies between the advance credit received and the actual amount of credit eligible will be reconciled on your income tax return, affecting either your refund or taxes payable.
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Impact of Health Savings Accounts (HSAs) on Your Taxes
Health Savings Accounts (HSAs) are another way health insurance can impact your taxes. An HSA is a tax-advantaged savings account available to individuals enrolled in a high-deductible health plan (HDHP). Contributions to HSAs are deductible on your tax return, reducing your taxable income. Moreover, the money in an HSA grows tax-free, and you won’t pay taxes on withdrawals used for qualified medical expenses.
In 2024, the contribution limits for HSAs are $4,150 for individual coverage and $8,300 for family coverage. An additional $1,000 catch-up contribution is allowed for those aged 55 and older. You, your employer, or anyone else on your behalf can contribute.
Employer-Sponsored Health Insurance
For those with employer-sponsored health insurance, your premiums are typically paid with pre-tax dollars, which lowers your taxable income. In addition, some employers offer Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs), allowing you to pay for qualified medical expenses with pre-tax dollars.
Employer-sponsored insurance is generally considered “affordable” if the employee’s share of the premiums for the lowest-cost, self-only coverage that meets the minimum value standard is less than 8.39% of their household income in 2024. If your employer offers coverage that meets these criteria, you are not eligible for the Premium Tax Credit.
COBRA and Its Tax Implications
If you lose your job or experience reduced work hours, you may be eligible to continue your employer-sponsored health insurance through COBRA (Consolidated Omnibus Budget Reconciliation Act). While COBRA can be a lifeline, it is often expensive because you need to pay the full premium, including the portion your employer used to pay.
There is no direct tax deduction for COBRA premiums. Still, if your total medical expenses, including COBRA premiums, exceed 7.5% of your adjusted gross income (AGI), you can deduct the excess as an itemized deduction on your tax return.
Health Insurance and Self-Employment
Health insurance premiums can be a big expense for a self-employed individual. The good news is that you can deduct your health insurance premiums directly from your income, reducing your taxable income. This deduction is available even if you don’t itemize your deductions. However, remember that this deduction only applies to months when you were not eligible for a health plan through an employer or your spouse’s employer.
TIP: If you’re self-employed and pay for your own health insurance, don’t forget that premiums paid for dental, vision, and long-term care insurance may also be deductible.
Reporting Requirements and Penalties
When filing your taxes, you must report whether you had health insurance coverage for the year. If you bought insurance through the Health Insurance Marketplace, you should receive Form 1095-A. This form provides details about your coverage and any Premium Tax Credit advance payments. It’s also necessary for completing Form 8962, which is used to reconcile any advance credit payments you received with the actual Premium Tax Credit amount you qualify for based on your income.
Failing to report this information accurately or not having the necessary forms can delay your refund or lead to penalties. Additionally, if you received excess Premium Tax Credit advance payments, you might have to repay the difference when you file your return.
What If You Have Health Insurance Through a Foreign Provider or No Health Insurance?
If you’re a U.S. citizen living abroad, you might wonder how the ACA impacts you. The good news is that if U.S. citizens are not physically present in the United States for at least 330 full days within a 12-month period, the IRS treats them as having minimum essential coverage for that period, regardless of whether they enroll in any health care coverage. Additionally, if U.S. citizens are bona fide residents of a foreign country for an entire taxable year, the IRS also considers them as having minimum essential coverage for that year.
These individuals can qualify for this exemption even if they do not use the Foreign Earned Income Exclusion under section 911 of the tax code. The exemption can be claimed by filing Form 8965 with your tax return.
Secure Your Financial Health Today
Health insurance doesn’t just impact your health—it can affect your taxes, too. By understanding how these connections work, you can make smarter decisions that could save you money and keep you compliant.
For tailored advice that fits your unique situation, contact us at Tax Samaritan. Your financial health deserves the same attention as your physical well-being. Let’s make sure you’re covered on all fronts.
All About Randall Brody
Randall is the Founder of Tax Samaritan, a boutique firm specializing in the preparation of taxes and the resolution of tax problems for Americans living abroad, as well as the other unique tax issues that apply to taxpayers. Here, they help taxpayers save money on their tax returns.