http://www.consumerreports.org/health-insurance/downside-of-high-deductible-health-insurance/
Are Health Insurance Premiums Tax-Deductible?
July 22, 2015 by
You know you can deduct some medical expenses from your federal income taxes, but don’t know the specifics. Here’s a look at what is and isn’t allowed.
“Medical bills can be a huge expense, so the Internal Revenue Service gives people a break so they can recoup some of that money,” says Lisa Greene-Lewis, a certified public accountant with TurboTax.
Some 10.2 million U.S. households collectively deducted $85.3 billion of medical expenses on their 2012 federal tax returns, according to the latest available Internal Revenue Service statistics. Many Americans can make similar write-offs from their state income taxes as well.
But who can deduct what is pretty complicated, and experts say few taxpayers really understand the rules.
“I think the biggest misconception is that people think that all medical expenses are deductible from dollar one. But for my clients, I’d say that well under 10 percent actually qualify to deduct anything,” says Rob Seltzer, a Los Angeles certified public accountant and chairman of the California Society of CPAs’ Financial Literary Committee.
Here’s a look at the basics of deducting medical expenses from your federal income taxes. Consult your tax advisor for specifics regarding your personal situation.
Who qualifies for medical-expense deductions?
The Internal Revenue Code includes two big rules that can severely limit who truly qualifies for relief from medical expenses:
- You must generally itemize deductions on Form 1040 Schedule A rather than take the “standard deduction” if you want a break on medical expenses. If what you plan to deduct for everything (from medical bills to mortgage interest) adds up to less than the standard deduction ($6,400 for singles and $12,600 for married joint filers in 2015), there’s no point in itemizing.
- Most taxpayers can only deduct allowable medical expenses that exceed 10 percent of “adjusted gross income” (AGI). That’s the amount you earn in a given year from wages, investments and other sources minus what you paid for alimony, student-loan interest and a few other things. So, if a married couple has $100,000 AGI and $10,500 of qualified medical expenses, they can deduct only $500 — $10,500 minus $10,000 (10 percent of their $100,000 AGI). Note: In 2015 and 2016, seniors age 65 or older can deduct any medical expenses above 7.5 percent of AGI.
Seltzer says the only taxpayers who pass both tests are typically those with unusually high medical expenses relative to income. That’s often just the elderly, the unemployed, low-income people or those with big medical bills due to serious illness, in-vitro fertilization or a child’s birth.
Are health insurance premiums deductible?
Yes, in certain circumstances, you can deduct your health insurance premiums as part of your overall medical expenses.
But you can deduct only premiums that you pay with after-tax money from your own pocket. For example:
- If your health insurance premiums are paid entirely by your employer or the government, you cannot deduct the cost.
- If you have health insurance through your employer and your share of the premium is deducted from your paycheck pre-tax, you cannot deduct the cost because the premiums were tax-free already. If you don’t know whether you pay pre-tax or after-tax, ask your human resources department.
- If you buy health insurance through the state- or federally run health insurance marketplaces, you can deduct only the portion of the premium you pay out of your own pocket. You cannot deduct the amount of any subsidy.
- If you buy an individual or family health insurance plan, either on the open market or through a marketplace, and you pay all of the cost out of pocket, then the whole amount is deductible.
Your total medical expenses, including premiums, must surpass 10 percent of your adjusted gross income to be deductible.
What else is deductible?
Assuming you pass the above tests, the IRS lets you write off pretty much every out-of-pocket medical expense that’s ordered by a doctor or other health care professional. (See IRS Publication 502 for a list.)
Common items you can deduct from taxes include medical appointments, tests, prescription drugs and durable items like wheelchairs and prescription glasses. In fact, you can even write off unusual expenses as long as they’re medically necessary. For instance, one of Seltzer’s clients deducted a home lap pool because a serious injury meant the man could only swim for exercise but couldn’t risk colliding with others in a public pool.
You can also deduct transportation expenses for going to the doctor — parking, tolls, mileage, cab or bus fares — and even air fare and certain lodging costs for out-of-town treatments.
But remember, you can only write off out-of-pocket expenses — copays, deductibles, etc. — not bills that your insurance covers.
What’s not deductible?
There’s a wide list of things you can’t deduct, from medical marijuana to over-the-counter vitamins and drugs (except insulin). Hair transplants and cosmetic surgery are also out, unless procedures correct underlying medical problems (like breast-reconstruction surgery following mastectomies).
As noted above, you also can’t deduct expenses that your insurance covers, nor things you paid for with money from a flexible spending account or health savings account. If you get insurance through work, you typically can’t write off your share of the premiums because your employer won’t normally withhold taxes on the money in the first place.
Writing off health insurance for the self-employed
One big exception to the above rules involves health insurance premiums paid by self-employed people. You can write those off as adjustments to income even if you don’t itemize your deductions. The adjustment to income cannot exceed what you earned, though.
Self-employed people can deduct health insurance premiums directly on Form 1040 (Line 29 on returns for the 2014 tax year). You deduct all other qualified medical expenses on Schedule A, Line 1.
How to maximize your health care deductions
You obviously can’t control when you get sick, but TurboTax’s Greene-Lewis says Americans who are close to meeting the annual AGI threshold should “bunch up” procedures to maximize any deductibility.
For instance, if one family member has a major illness in a given year and rings up big hospital bills, everyone else in the family should get any needed dental work, prescription eyeglasses, etc., during the same year in order to boost the available tax break.
“You should look at anything you were putting off and bump it up [to the current tax year] if that’s going to put you over the AGI threshold,” she says.
You don’t need to attach receipts to your 1040, but it’s a good idea to keep them for three years after filing your return just in case the IRS audits you.
This article original appeared on Insurance.com
1 Easy Way to Save Money on Health Care Expenses.
July 21, 2015 by
The average American spent $400 more on health care and health insurance in 2012 when compared to 2010, a gain of 12.5%. This compares to just a 7% gain in total average spending, meaning that more and more health care costs are taking a bigger bite out of consumers’ income.
One thing individuals can do to help save money on health care costs is utilize a Health Savings Account, or HSA. These savings accounts allow individuals with high-deductible health insurance to save money for medical expenses without paying taxes.
What an HSA is
People with health insurance deductibles greater than $1,250 for an individual and $2,500 for families can qualify for an HSA. An individual is then allowed to contribute $3,300 to an HSA tax-free in 2014, and the limit stands at $6,550 for an individual with a family.
In turn, that money is withdrawn before taxes every month into a special savings account and can be used on qualified medical expenses, which the IRS defines as those used for the “diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.”
Those of course include hospital visits, prescription medicines, and other services, but also thing like eyeglasses, insulin, and hearing aids. The complete list is available from the IRS.
Yet not only is the money contributed tax-free, but it also grows tax free and is withdrawn tax free, known as “triple tax savings.” This means if you don’t use the $2,000 amount saved and it grows to $2,500 after years of interest payments, that $500 doesn’t face the capital gains tax like other investments, and you’ll never pay a single cent in taxes when it is withdrawn.
All told, an HSA can be an incredibly effective tool to help save on health care expenses that all people face in their lifetimes.
How an HSA works
Those with high-deductible plans can get an HSA through their current insurer if they offer it, or through a bank like Bank of America (NYSE: BAC ) or Wells Fargo (NYSE: WFC ) . The person will then decide how much they want to save each month, and then that money is withdrawn and put into the account.
Like any other bank account, there is an associated debit card that is issued to pay for those eligible health care expenses. Also, the money can be invested into mutual funds provided the balance of the HSA exceeds $1,000, and also investments that pay less interest, but have much lower risk. It should be noted that individuals should ensure they have enough to cover potential unplanned expenses before they invest heavily in funds that may be volatile and stand the chance to lose money.
Individuals should also always review all account disclosures for fee information, interest rates, FDIC coverage, and other information to ensure their HSA is with a trustworthy provider and indeed is what’s best for them.
Why you should get an HSA
The principal benefit of the HSA is the tax savings it provides. Consider the example Bank of America provides on its website of a family of four that saves $4,000 over 20 years, spends $2,000 each year, and the account grows at just 2.5%. That family would have saved $23,091 in taxes, and have more than $51,000 in the account at the end of year 20.
Outside of the tax benefits of an HSA, a great benefit too is that unlike Flexible Spending Accounts (FSA) that are owned by your employer, the money in an HSA is yours, it never expires, and can be saved for years and years.
There is no denying the cost of health care is on a troubling path, but using an HSA can help consumers ease the burden through significant tax savings and other crucial benefits.
5 Ways to Reduce Small Business Health Insurance Costs.
June 30, 2015 by
Business health insurance is a major cost of doing business, especially for small companies and mom-and-pop firms. With premiums soaring, many small business owners are asking their employees to shoulder more of the financial burden or cutting benefits entirely.
The New York-based Commonwealth Fund, an advocacy group for health care reform, says small business health insurance costs average 18 percent more than those of larger businesses. In California, health insurance costs increased 10 percent in 2006 alone, according to the California Employer Health Benefits Survey.
Those costs have proven too high for many small businesses. According to the U.S. Chamber of Commerce, more than 45 million Americans are uninsured, and approximately 60 percent of the uninsured are employed by small businesses.
In 2006, the average monthly cost for health insurance for small group plans, which are largely used by small businesses, was $311 per month, according to a survey by America’s Health Insurance Plans, a trade group representing health insurance companies. The average premium for a family of four was $814 per month, the association reported.
Small business health insurance may take a huge chunk out of your revenue, but benefits often attract better employees and help retain existing workers. Satisfied, healthy employees are more likely to help your business grow. If you’re struggling to provide health insurance, here are some tips that could reduce your small business health insurance costs.
1. Keep employees healthy. Motorola Inc., for example, has instituted a comprehensive wellness program that includes disease management for afflictions such as asthma and diabetes, as well as offering flu shots, cancer screenings, smoking-cessation sessions and a round-the-clock phone line staffed by nurses. The company found that for every dollar it invested, it saved $3.93, according to a 2003 report by the U.S. Department of Health and Human Services report, “Prevention Makes Common Cents.” Likewise, heavy machinery manufacturer Caterpillar estimates that its wellness program will save the company $700 million by 2015.
Such wellness programs don’t just keep company accountants happy. They’re also popular with workers. Pharmaceutical giant Pfizer Inc. found that 85 percent of its employees in its New York offices participated in at least one wellness program, and that 80 percent used on-site facilities such as fitness centers or physical therapy, according to the HHS report.
2. Reduce coverage. Cutting coverage or asking your employees to contribute more to the plan is a logical step to reducing small business health insurance costs. The downside of this strategy is that it will likely prove unpopular with workers.
It’s fairly common for businesses to exclude dental and vision insurance, but talk to your employees to see what they want covered. They might opt for having dental and vision insurance and a health savings account, for example.
3. Consider health savings accounts. Health savings accounts are an increasingly popular option for owners of small businesses. These tax-exempt accounts, which are used to pay for certain medical expenses, could reduce your small business health insurance costs while giving your employees tax breaks.
You must have a high-deductible health insurance plan to establish a health savings account. For example, in 2007 the minimum deduction for individuals is $1,100; for families, it is $2,200.
That means that you or your employees would have to pay $1,100 out of your own pockets for health care expenses such as doctors’ visits or prescriptions before you are reimbursed by the insurance company.
But there are benefits: In 2007, employers, workers, and their families can contribute tax-free up to $2,850 for individual health savings accounts or $5,650 for family accounts. These funds can only be used to cover health care costs, and employees can take their accounts with them if they leave. The funds generally do not expire.
Contributions and withdrawals are both tax-free, and individuals can claim tax deductions on their 1040 forms – meaning employees don’t need to itemize to get the tax break. Employer contributions are also tax-deductible for business owners but are not required. Individuals can also set up health savings accounts.
To establish or participate in a health savings account, your only comprehensive health insurance can be the high-deductible health insurance plan and they must be offered to all employees.
Health savings accounts benefit healthy employees who do not regularly see doctors. You or your employees can, however, have health insurance that specifically covers ailments, including certain diseases or illnesses, accidents, dental and vision care.
4. Join a group. Small group health insurance plans cover between two and 50 employees, although there are “group of one” insurance plans for the self-employed that offer similar benefits.
The larger your group, the lower your premiums will be. According to the America’s Health Insurance Plans 2006 survey, 80 percent of small groups polled had 10 or fewer employees in their health insurance plans, and the average monthly premiums for individuals was $330. Firms with between 26 and 50 employees paid $287 a month for single premiums.
If your business has fewer than 10 employees, you can still partner with other businesses or individuals and expand your group plan. Note that health care laws are governed by the states, so you’ll want to partner with people in your state.
5. Shop around. Health insurance is a huge business, so shopping around for different providers could reduce your small business health insurance costs. Start by searching the Internet and also ask other owners of small businesses what they pay for health insurance. Insurance agents will charge fees, but you’ll save time and they can investigate health insurance plans for you. The National Federation of Independent Businesses partnered with eHealthInsurance, a national health insurance agency that gives you several quotes online.
Consumer-Driven Health Plans (CDHP)
April 29, 2014 by
Consumer-Driven Health Plans (CDHP) are a category of health insurance plans that combine a high deductible amount with a savings account to pay for a portion of medical expenses with pretax dollars. The pretax dollars set aside for medical expenses are kept in a Health Savings Account (HSA) or a Health Reimbursement Account (HRA). HSA savings accounts are only available to enrollees enrolled in a high deductible health plan.
If you are considering a health plan that offers the option of either a HSA or a HRA, see our article “HSA vs HRA” to determine which of these savings account options is right for your circumstances.
CDHPs can only use high deductible health plans to provide health insurance benefits. To qualify as a high deductible health plan for an individual, the deductible amount must be at least $1,250 in 2013. The minimum deductible for a family is $2,500 in 2013 in order to qualify as a high deductible health plan. High deductible health plans are associated with lower premiums as compared to health plans with smaller deductibles.
Three-Tiered Payment Systems
Consumer-driven health plans are sometimes referred to as three-tiered payment plans. This is because one of three entities can pay medical costs:
- The savings account associated with the CDHP (e.g. HSA or HRA)
- The consumer in the form of payments made out-of-pocket
- The insurance plan
In order for the savings account to pay for medical bills, it must have sufficient funds in it.
Once the deductible amount is satisfied, the CDHP operates similarly to a traditional health plan where the insurance pays the majority of a covered medical service and the enrollee pays a copayment or coinsurance fee.
Consumer-Driven Healthcare
CDHPs are part of a larger set of practices known as “consumer-driven heathcare.” Consumer-driven healthcare seeks to introduce competitive market forces to healthcare by exposing a larger portion of costs to consumers and, by doing so, encourage price shopping. While the consumer pays more out-of-pocket, they typically enjoy lower insurance premiums while still gaining protection from catastrophic healthcare costs associated with a major medical event or condition. However, in order for consumer-driven healthcare to be effective it requires consumer access to medical costs. At present this costs are not always available to consumers.
The opposite of consumer-driven healthcare is found in many pre-reform health plans where consumers have no incentive to comparison shop costs when healthcare prices are hidden from them by flat fee copayments that are the same regardless of which healthcare provider is used. Critics of consumer-driven healthcare argue that high out-of-pocket costs result in lower short-term medical utilization that results in more expensive lifetime healthcare costs. Present research has not been able to support that claim.
The Tax Penalty Won’t Push People to Buy Health Insurance.
June 27, 2013 by
The Tax Penalty Won’t Push People to Buy Health Insurance
Two-thirds of people surveyed by HealthPocket say a $95 IRS penalty for being uninsured won’t motivate them to buy insurance. Nearly 30% are not sure whether the penalty will motivate them to buy insurance, and only 8% say it would.
Beginning in 2014, the Affordable Care Act requires consumers to buy health insurance or face a tax penalty, with some exceptions for people with financial hardships or religious beliefs that preclude them from purchasing health insurance, among others.
The tax penalty starts at $95 per individual or 1% of household income, whichever is greater. By 2016, the penalty rises to 2.5% of annual household income or a minimum of $695 per person, whichever is greater. Bruce Telkamp, CEO of HealthPocket said, “The law will be most effective if consumers see real value in obtaining the insurance coverage. Only insurers that offer high quality and affordable health plans should expect to see significant new enrollments this fall.”
The tax penalty is not the only strategy that Obamacare will use to promote enrollment. Some premium and out-of-pocket assistance is available for individuals making less than 400% of the federal poverty level or $45,960. However, 63% of consumers who fall in this income band say a tax penalty will not motivate them, indicating that that they need more outreach. For more information, visitwww.HealthPocket.com
HSAs Gain Strength As Crucial Retirement Planning Tool.
May 27, 2013 by
Most retirees will spend an average $250,000 in out-of-pocket health costs during their retirement years, seriously cutting into their nest egg. The flexibility of HSAs and the tax advantages they offer may afford many workers the ability to contribute to their future health needs over their working careers and amass enough wealth to help chip away at their out-of-pocket expenditures. This may be particularly important when workers begin paying Medicare premiums, which are likely to rise when retirees are required to take minimum distributions from tax-advantaged retirement accounts, according to Investment News. Required minimum distributions from tax-qualified retirement plans, pensions and Social Security can trigger an increase in income that results in permanent Medicare premium hikes. As HSAs are tax-free income sources when distributions are used to cover qualified medical expenses, the use of them may help workers cover their costs and premium payments according to a recent report at www.algeus.com.