How Private Insurance Impacts Your Taxes

Whether you have private health insurance or not can affect your taxes, depending on where you live and the type of insurance you choose. For example, in Australia, the government offers a rebate on private health insurance that could give back almost a third of your premium. On the other hand, if you don't have private insurance and your income is over a certain threshold, you may have to pay an additional tax called the Medicare Levy Surcharge. In the US, self-employed people can usually deduct the cost of health insurance from their taxable income, but the rules are different for employees. Understanding the tax implications of health insurance is crucial for planning and staying compliant with the law.

The private health insurance rebate

The rebate can be claimed in two ways. The first is as a premium reduction through your private health insurer, where you pay less upfront to your insurer. The second is as a tax offset when lodging your annual tax return. To be eligible for the rebate, you must meet certain criteria, including your policy and income.

The Australian government has several initiatives to encourage people to get private health cover. One such initiative is the Medicare Levy Surcharge (MLS), which is a percentage of an individual's income payable to the Australian Taxation Office (ATO) when lodging their tax return. The MLS is applicable to high-income earners without private health insurance. By encouraging high-income earners to get private health insurance, the government aims to reduce the burden on the public healthcare system.

Another initiative is the Lifetime Health Cover (LHC) loading, which is a financial loading applied to an individual's hospital premium if they don't take out private hospital cover from the year they turn 31. The LHC loading is removed once an individual has held hospital cover and paid the loading for ten continuous years.

The Medicare Levy Surcharge

The MLS is calculated as a percentage of your income, ranging from 1% to 1.5%. This surcharge is in addition to the standard Medicare Levy, which is 2% of taxable income for most Australian taxpayers. For the 2023-24 financial year, the MLS income thresholds are set at $93,000 for singles and $186,000 for families or couples, with an additional $1,500 added per dependent child after the first. From 1 July 2024, these thresholds will increase to $97,000 for singles and $194,000 for families or couples.

To avoid paying the MLS, individuals must ensure their income is below the threshold or purchase an approved hospital insurance policy with a registered health insurer. The policy must include private patient hospital cover and have a maximum excess of $750 for singles or $1,500 for couples or families. Basic tiers of private hospital cover are usually sufficient to help individuals avoid paying the MLS.

It is important to note that the MLS is separate from the Private Health Insurance Rebate, which is a partial refund or discount on health insurance premiums provided by the Australian Government to encourage private health cover.

The Lifetime Health Cover loading

The Lifetime Health Cover (LHC) is an Australian Government initiative that started on July 1, 2000, to encourage people to get their hospital cover early and maintain it. It is not directly related to tax but is an important consideration when deciding on health insurance.

If you don't get hospital cover before July 1 following your 31st birthday, you will pay a 2% loading on your hospital cover premium for every year you are without cover after turning 30. This is called the Lifetime Health Cover loading. For example, if you wait until you are 40 to get hospital cover, you will pay an additional 18% on your premium. The maximum LHC loading is 70%, and it stops after 10 years of continuous hospital cover.

To avoid the LHC loading, you can take out hospital cover by July 1 following your 31st birthday. This is called your base day. If you are on a couple or family cover, the loading is calculated by taking an average of the loadings applied to the adults.

There are some exemptions to the LHC loading. People born on or before July 1, 1934, are exempt, as are some veterans and members of the Australian Defence Force.

If you have hospital cover on or after your base day, you are entitled to 1,094 days without hospital cover that won't affect your LHC loading status. This is known as "Days of Absence." If you exceed this number of days, you will have to pay an LHC loading if you take out hospital cover again, and it will be higher than before.

If you suspend your hospital cover by applying to your health insurer, this period won't count towards your Days of Absence, and your loading won't increase. If you cancel your cover to go overseas for at least one continuous year, the days spent outside Australia won't count towards your Days of Absence either, as long as you don't return for periods of more than 90 consecutive days.

If you are a new migrant to Australia and are aged 31 or over, you won't have to pay an LHC loading if you take out hospital cover within 12 months of registering for Medicare.

The Premium Tax Credit

When enrolling in Marketplace insurance, you can choose to have the Marketplace compute an estimated credit that is paid to your insurance company to lower your monthly premiums (advance payments of the Premium Tax Credit, or APTC). Alternatively, you can choose to receive the full benefit of the credit when filing your tax return for the year. If you choose to receive advance payments of the Premium Tax Credit, you will need to reconcile the amount paid in advance with the actual credit you compute when filing your tax return for the year. Either way, you will need to complete Form 8962, Premium Tax Credit (PTC) and attach it to your tax return for the year.

It is important to note that the credit is "refundable" because, if the amount of the credit is more than the amount of your tax liability, you will receive the difference as a refund. If you owe no tax, you can get the full amount of the credit as a refund. However, if advance credit payments were made to your insurance company and your actual allowable credit on your return is less than your advance credit payments, the difference, subject to certain repayment caps, will be subtracted from your refund or added to your balance due for tax years other than 2020.

To be eligible for the Premium Tax Credit, you must meet the following requirements:

• Have household income that falls within a certain range. For the tax years 2021 through 2025, Congress temporarily expanded eligibility by eliminating the requirement that a taxpayer's household income may not be more than 400% of the federal poverty line.
• Do not file a tax return using the filing status of Married Filing Separately. There is an exception to this rule that allows certain victims of domestic abuse and spousal abandonment to claim the credit using Married Filing Separately.
• Cannot be claimed as a dependent by another person.
• In the same month, you or a family member must:
• Have health insurance coverage through a Health Insurance Marketplace for which the share of the premium not covered by advance credit payments is paid by the due date of your return.
• Be unable to get affordable coverage through an eligible employer-sponsored plan that provides minimum value.
• Not be eligible for coverage through a government program, such as Medicaid, Medicare, CHIP, or TRICARE.

The Individual Shared Responsibility Payment

If an individual was uninsured for only part of a year, they would pay a partial penalty, pro-rated for the amount of time they were without coverage. For example, if the total penalty amount for a year was $1,380, and an individual was uninsured for five months, their penalty would be $575 (five-twelfths of $1,380). No penalty was applied for uninsured periods of less than three months.

Frequently asked questions