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With the health insurance open enrollment period underway, it’s time to review your health insurance options and understand the potential tax benefits associated with your healthcare coverage. Health insurance expenses can impact your taxes in several ways, and taking advantage of available deductions, credits, and employer arrangements can help you save.
As a reminder, the open enrollment period launched November 1, 2024, and concludes January 15, 2025. You can enroll in, renew, or change your health insurance plans through the Affordable Care Act (ACA) marketplace or your state’s exchange after comparing plans for one that fits your needs best.
This is the first of a series of articles we are publishing regarding tax implications related to health insurance for individuals and small businesses. Below are the top six things you should consider regarding taxes and health insurance.
- Self-Employed Health Insurance Deduction
If you’re self-employed, open enrollment is an ideal time to explore health insurance plans, as you may be eligible for a 100% deduction of health insurance premiums paid for yourself, your spouse, and dependents. This deduction reduces your adjusted gross income, which lowers your taxable income and applies regardless of whether you itemize deductions. One key factor is that the deduction cannot exceed your net profit from the business. This deduction can be a valuable way to lessen the tax impact of health insurance costs if you’re self-employed.
- Health Savings Account (HSA) Contributions
Enrolling in a high-deductible health plan (HDHP) during open enrollment can give you access to a Health Savings Account (HSA), which offers triple tax benefits. Contributions are tax-deductible, grow tax-free, and can be withdrawn tax-free when used for qualified medical expenses. In 2024, the contribution limits are $3,850 for individuals and $7,750 for families (2025 limits are $4,300 and $8,550 respectively), with an additional $1,000 catch-up contribution for those aged 55 or older. HSAs can be a powerful tax-saving tool, especially if you’re preparing for healthcare expenses in retirement or aiming to reduce your current taxable income.
- Premium Tax Credit for Marketplace Plans
If you’re purchasing health insurance through the Health Insurance Marketplace, you may qualify for the Premium Tax Credit (PTC) based on household income and family size. The PTC can help lower the cost of premiums, and you can receive it in advance or claim it on your tax return. The open enrollment period is the time to update your income and household information with the Marketplace, as this affects your PTC eligibility. Properly adjusting these details can help you make the most of this credit and avoid potential surprises during tax season. Be sure to obtain and retain your 1095-A from your provider; you’ll need it to claim the credit on your taxes!
- Long-Term Care Insurance Premiums
If you’re considering long-term care insurance, premiums paid for a qualified policy may be deductible as medical expenses, subject to age-based limits. These premiums contribute to the medical expenses deduction threshold mentioned above (7.5% of AGI). Although this deduction is not exclusively tied to open enrollment, this is a good time to review any long-term care needs and their potential tax impact as you assess overall health coverage.
- Employer-Sponsored Plans and QSEHRA Reimbursements
If you’re an employee with health insurance premiums paid through an employer-sponsored plan, those premiums are generally paid with pre-tax dollars, meaning they’re not deductible since you’re already benefiting from a tax break.
For employees of small businesses, a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) offers a unique benefit. Under QSEHRAs, small employers (those with fewer than 50 full-time employees) can reimburse employees for health insurance premiums and other medical expenses on a tax-free basis, as long as the employee has minimum essential coverage. Employers can deduct these reimbursements as a business expense, while employees receive the funds tax-free, making it a win-win for both parties.
For 2024, QSEHRA reimbursement limits are set at around $5,850 for individuals and $11,800 for family coverage families (2025 limits are $6,350 and $12,800 respectively). Note that if you qualify for the Premium Tax Credit through the Health Insurance Marketplace, the amount reimbursed through QSEHRA can affect the credit, as you can’t receive full benefits from both. Additionally, QSEHRAs may impact Health Savings Account (HSA) eligibility, as an employee with QSEHRA reimbursement for all medical expenses may not be able to contribute to an HSA.
- Itemized Deduction for Medical Expenses
If you plan to itemize deductions this tax year, you can potentially deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI), including health insurance premiums. For instance, if your AGI is $50,000, medical expenses over $3,750 are eligible for deduction. Deductible expenses go beyond premiums and can include out-of-pocket costs for doctor visits, surgeries, dental and vision care, mental health services, and more.
It’s important to remember that only expenses that exceed the 7.5% threshold count toward the deduction, so if your total medical costs are below this, you may benefit more from taking the standard deduction rather than itemizing.
Make the Most of Open Enrollment
As you navigate the open enrollment period, take a moment to review how health insurance decisions impact your taxes. Whether you’re eligible for specific deductions, contributions to an HSA, or potential tax credits, understanding these options allows you to tailor your health coverage to both meet your needs and maximize tax savings. Open enrollment is more than just selecting a plan; it’s an opportunity to optimize your financial health alongside your physical well-being. For personalized guidance, consult a tax professional or use reputable tax software to ensure you’re making the most tax-savvy decisions for the year ahead.