Understanding Private Insurance With Turbotax

Private insurance is a type of health insurance that is not provided by an employer. It can be purchased directly from an insurance company or through the Health Insurance Marketplace. The cost of private insurance is based on the income filed on your tax return and can be tax-deductible if certain criteria are met. For example, if you are self-employed and not eligible for an employer-sponsored health plan, you may be able to write off your health insurance premiums on your taxes. Additionally, premiums paid for private health services plans, such as medical, dental, and hospitalization plans, may be considered eligible medical expenses. However, it is important to note that there are specific rules and limitations when claiming deductions for private insurance, and not all expenses may qualify.

Self-employed health insurance premiums

If you are self-employed, you may be able to deduct premiums that you pay for medical, dental, and qualifying long-term care insurance coverage for yourself, your spouse, and your dependents. This is known as the self-employed health insurance deduction.

This health insurance write-off is entered on Part II of Schedule 1 as an adjustment to income and transferred to page 1 of Form 1040, which means you benefit whether or not you itemize your deductions. Unlike an itemized deduction, this deduction treatment is beneficial because it lowers your adjusted gross income (AGI). Having a lower AGI can reduce the odds that you’ll be affected by unfavourable phase-out rules that can cut back or eliminate various tax breaks.

You can't claim the health insurance premium write-off for months when either you or your spouse were eligible to participate in an employer-subsidized health plan. The health insurance premium deduction can't exceed the earned income you collect from your business.

Eligibility is determined month-by-month. For example, if you were single and ineligible for any employer-provided health plan during the last six months of the year because you left your job and started your own business, you can claim the deduction for premiums you paid for coverage during that six-month period.

Medical expense tax credit

The Medical Expense Tax Credit is one of the most overlooked non-refundable tax deductions. It can significantly reduce your taxes, but it is not always obvious which medical expenses are eligible.

The Internal Revenue Service (IRS) allows all taxpayers to deduct their qualified unreimbursed medical care expenses that exceed 7.5% of their adjusted gross income. To receive a tax benefit, you have to itemize your deductions on Schedule A, and your total itemized deductions must be greater than your Standard Deduction.

Some of the lesser-known deductible medical expenses include acupuncture, addiction treatment, braille publications, chiropractic services for medical care, contact lenses, diet food, exercise programs, and health, dental and vision insurance premiums.

The Canada Revenue Agency (CRA) has compiled a list of allowable deductible expenses on its website. This list is not exhaustive and includes items such as prescribed medicines, health insurance premiums, baby-breathing monitors, and environmental control systems.

To determine if your plan qualifies for the Medical Expense Tax Credit, you will need to analyze the coverage it provides and compare it to the list of eligible medical expenses from the CRA.

Health insurance affordability

For those who purchase health insurance privately or through the Health Insurance Marketplace, it's important to note that the Medical Expense Tax Credit can significantly reduce your taxes. Payments for premiums on private health service plans, including medical, dental, and hospitalization plans, may qualify as tax deductions if they meet certain criteria.

Additionally, self-employed individuals can deduct health insurance premiums, including age-based premiums for long-term care coverage. This deduction is beneficial as it lowers your adjusted gross income (AGI), reducing the odds of being affected by unfavourable phase-out rules that can cut back or eliminate various tax breaks.

Furthermore, if you obtain your health insurance from the Health Insurance Marketplace, you may be eligible for a tax credit to offset premium payments. This credit is determined by the information on your tax return, including your adjusted gross income.

It's worth noting that for tax years before 2019, individuals who chose not to purchase health insurance were required to make an individual shared responsibility payment with their tax return. However, beginning after 2018, there is no longer a federal tax penalty for not having health insurance.

Understanding health insurance affordability and the associated tax implications can be complex. Consulting with a tax expert or accountant can help you navigate these matters and ensure you're taking advantage of all eligible deductions and credits.

Health insurance tax deductions

Private health insurance plans are eligible for tax deductions, but only if they meet certain criteria. In the US, for example, you can only deduct health insurance rates on your taxes if you itemize your deductions, pay your health insurance premiums directly, and your total medical costs must be more than 7.5% of your adjusted gross income (AGI). Self-employed individuals may be able to deduct their health insurance premiums, even if their expenses do not exceed the 7.5% threshold.

According to the Canada Revenue Agency (CRA), premiums paid to private health services plans, including medical, dental, and hospitalization plans, are considered eligible medical expenses. To be eligible, the plan must be an insurance plan (not another form of contract) and must cover medical expenses that are themselves eligible for the Medical Expense Tax Credit. The CRA considers a plan eligible if all or substantially all (approximately 90% or more) of the premiums paid under the plan relate to eligible medical expenses.

In the US, if you are enrolled in an employer-sponsored health insurance plan, your premiums may already be tax-free. If your premiums are made through a payroll deduction plan, they are likely made with pre-tax dollars, so you cannot claim a year-end tax deduction. However, you may still be able to claim a deduction if your total healthcare costs for the year are high enough.

If you are self-employed in the US, you may be eligible to deduct premiums that you pay for medical, dental, and qualifying long-term care insurance coverage for yourself, your spouse, and your dependents. This deduction is entered on Part II of Schedule 1 as an adjustment to income and is beneficial because it lowers your AGI. However, you cannot claim the health insurance premium write-off for months when you or your spouse were eligible to participate in an employer-subsidized health plan. Additionally, the deduction cannot exceed the earned income you collect from your business.

Health insurance tax penalties

According to the Affordable Care Act, the premiums you pay to an employer-sponsored health plan for your coverage can't exceed 9.12% of your 2023 household income. If you add coverage for other members of your family, the premiums may exceed 9.12% of your household income.

Exemptions from health insurance requirements

There are a number of exemption provisions under which you may avoid the requirement to have health insurance. These include:

• Unaffordable care—if minimum coverage would cost more than 8% of your household income, you may qualify for an exemption.
• No tax filing requirement—having an income below the Internal Revenue Service's filing threshold exempts you from the coverage requirement.
• Hardship—if you experience a hardship that prevents you from getting coverage, the Health Insurance Marketplace may certify your exemption.
• Short coverage gaps—if your coverage lapses for less than three consecutive months.
• Membership in an exempt group—Native American tribes, prisoners, undocumented immigrants, members of health care sharing ministries and those whose religious beliefs prevent them from having insurance are exempt from the requirement to be insured.

Assessment and collection of penalties

For tax years between 2014 and 2018, if you qualified for health insurance and didn’t meet the exemption requirements, but still chose to remain without coverage, the IRS assessed penalties through your tax return. This fee was calculated as either a flat rate or a percentage of your qualifying annual household income, whichever rate was higher.

The penalty for not having coverage was eliminated beginning with the 2019 tax year. Although you are technically still required to have minimum essential coverage, there is no longer a penalty for not having it.

Frequently asked questions