GoodRx Guide
Healthcare Costs and Taxes: Your GoodRx Guide
Overview
The Affordable Care Act, also known as Obamacare, is a 2010 healthcare reform law that paved the way for health insurance marketplaces. Approximately 14.5 million people gained access to affordable health insurance in 2022 to combat rising healthcare costs. These health marketplaces also come with ACA premium subsidies — known as premium tax credits — that reduce monthly insurance payments for qualified individuals.
If you don’t qualify for health insurance through the marketplace, there are other ways to decrease your healthcare costs. The following are some other tax benefits that can save you money on current medical expenses while preparing for future healthcare costs:
It’s important to keep good records, maintain tax forms, and follow the tax rules to avoid any unexpected penalties. If you need help during tax time, you can work with a trained tax professional such as an enrolled agent (EA) or certified public accountant (CPA).
Generally, you have until April 15 to file your tax return unless the IRS grants an extension or that day falls on a holiday or weekend. In that case, your tax return will be due on the next business day.
Credits
Tax credits are beneficial on your tax return because they reduce your tax bill dollar for dollar. Most credits are divided into two types: refundable or nonrefundable. Let’s say you owe $2,000 in taxes but have a $3,000 tax credit. Your tax liability would drop to $0. If you have a refundable credit, you’ll get a $1,000 tax refund. However, a nonrefundable credit can only reduce your tax bill to zero — you won’t receive any money.
Premium tax credits are refundable credits that make health insurance more affordable. They are based on your estimated income for the year and reduce how much you pay for health insurance. You can receive your credit in advance or when you file your tax return.
Here are some other credits that can save you money during tax time:
You can even qualify for credits if you had a baby any time during the year.
Deductions
Deductions reduce the amount of income that is subject to tax. The more deductions you receive, the less money you’ll have to pay taxes on.
Every taxpayer has two main deduction options: standard or itemized deductions. Generally, you are not allowed to deduct medical expenses on your tax return unless you itemize deductions.
There is an exception for self-employed individuals. Those that qualify may be eligible to deduct up to 100% of their premiums even if they claim the standard deduction. All other tax filers are only able to deduct qualified medical expenses that exceed 7.5% of adjusted gross income if they itemize deductions.
It’s important to keep good records and maintain expenses to identify all the deductions you may qualify for. You may be eligible for the following deductions depending on your situation:
Accounts
Tax law allows certain individuals access to tax-advantaged accounts to pay for qualified medical expenses. Some accounts have to be sponsored by an employer. Other accounts like an HSA can only be funded by an employee or self-employed individual who has a qualifying high-deductible health plan (HDHP).
Here are some tax-advantaged accounts that you may qualify for:
Health FSA (FSA)
Dependent care FSA (DCFSA)
Limited-purpose FSA (LPFSA)
Health savings account (HSA)
These accounts allow you to pay for qualified medical expenses that are not reimbursed by your employer. Each account comes with their own eligibility requirements and annual contribution limits.
The most popular account categories are HSAs and FSAs. These accounts reduce your taxable income and allow you to pay for qualified medical expenses tax-free. Unlike HSAs, you have to use all your money in an FSA within a certain time period, or you lose it.
Forms
You should receive all tax forms from the health insurance marketplace by early February. If you are missing any forms, you can download them from your HealthCare.gov account. You are required to file a tax return if you received health insurance through the marketplace and were granted premium tax credits.
Here are some common healthcare tax forms you should look for:
If you received Social Security Disability benefits, you will receive Form SSA-1099 from the Social Security Administration.
The IRS recommends taxpayers to submit their tax return electronically to avoid delays. You can use free tax-return preparation software if your income falls below the annual threshold. You may also be eligible to visit a local IRS Volunteer Income Tax Assistance (VITA) site if you want free tax help from a trained volunteer.
Penalties
You may be subject to taxes or penalties if you fail to report information to the IRS in a timely manner. This can include a late-payment penalty and a penalty for underpayment of estimated tax. Here are a few steps to take before you submit your tax return to make sure you won’t have to pay any taxes or penalties:
Ensure you have received all your tax documents
Confirm the accuracy of tax forms
Reconcile any payments you received from the government with the amounts you were eligible to receive
If you received more premium tax credits during the year than you were eligible for, you may have to pay back a portion, or all, of your ACA subsidy. You should review this information early, to avoid any filing delays.
The IRS no longer penalizes individuals who don’t have health insurance. However, there are five states (and the District of Columbia) that have an insurance mandate:
You may be subject to state penalties if you don’t comply with the mandate.
Common concerns
Nonqualified expenses typically include cosmetic surgery, funeral expenses, toothpaste, and toiletries. If you are not self-employed, you can only deduct qualified medical expenses that exceed 7.5% of your adjusted gross income. You must itemize deductions to take advantage of these benefits.
If you withdraw funds from your HSA, you will receive Form 1099-SA from your HSA provider. You won’t have to pay taxes on your distribution if it was used to pay for qualified medical expenses. However, if the withdrawal was used to pay for nonqualified expenses, you may be subject to a penalty.
If you need extra time to file your taxes, you can file a tax extension using Form 4868. This gives you 6 additional months to file your return. You still are required to pay any taxes due before the tax filing deadline.
References
CMS.gov. (2021). Marketplace 2022 open enrollment fact sheet. Centers for Medicare & Medicaid Services.
Division of Taxation. (n.d.). Health insurance mandate. The State of Rhode Island.
Franchise Tax Board. (2021). California healthcare mandate. State of California.
Healthcare.gov. (n.d.). Health coverage tax tool. Centers for Medicare & Medicaid Services.
Healthcare.gov. (n.d.). No health insurance? See if you'll owe a fee. Centers for Medicare & Medicaid Services.
Internal Revenue Service. (2021). About form 1099-SA, distributions from an HSA, archer MSA, or Medicare advantage MSA.
Internal Revenue Service. (2021). About form 4868, application for automatic extension of time to file U.S. individual income tax return.
Internal Revenue Service. (2021). About form 1095-C, employer-provided health insurance offer and coverage.
Internal Revenue Service. (2021). About form 1095-B, health coverage.
Internal Revenue Service. (2021). Health reimbursement arrangements.
Internal Revenue Service. (2022). About form 1095-A, health insurance marketplace statement.
Internal Revenue Service. (2022). About form 8962, premium tax credit.
Internal Revenue Service. (2022). Earned income tax credit.
Internal Revenue Service. (2022). Free file: Do your federal taxes for free.
Internal Revenue Service. (2022). Free tax return preparation for qualifying taxpayers.
Mass.gov. (2021). Health care reform for individuals. Commonwealth of Massachusetts.
Medicare.gov. (n.d.). Medicare medical savings account (MSA) plans. Centers for Medicare & Medicaid Services.
NJ.gov. (2021). NJ health insurance mandate. The State of New Jersey.
Social Security Administration. (n.d.). Replacement SSA-1099.
Vermont Health Connect. (n.d.). Individual mandate FAQ .
