If you are considering dropping your health insurance, given that the current tax penalty for not having coverage will be lifted starting in 2019, you are not alone. According to recent research, the elimination of Obamacare penalties may reduce the number of subscribers to individual and small-group insurance plans by 500,000. Here is a general idea of what not having health insurance looks like from an income tax perspective for New York tax payers who are self-employed:
Dropping health insurance will not immediately add to your tax burden in 2019. The penalty for not carrying health coverage, which was put in place as part of Obamacare, will no longer be added to your tax bill starting next tax year (2019). Keep in mind though, if you didn’t carry insurance this year you will have to pay $695 per person or 2.5 percent of income, whichever was higher, on your 2018 return.
Not having health insurance may increase your taxable income. While not having health insurance doesn’t add to your tax bill in 2019 and beyond, it will eliminate your ability to reduce your taxable income by deducting the cost of your health insurance premiums. This means that unless you have other deductions, you may need to factor in paying more in tax. Also, you will still be paying the same amount of Medicare and Social Security taxes.
You may not be able to itemize your out-of-pocket medical expenses. Without health insurance, freelancers have to pay their medical expenses out of pocket. However, given changes under tax reform to the standard deduction (now at $12,000 instead of $6,500) you would have to have a significant number of qualified deductions to make it worth itemizing them.
If you anticipate having a lot of healthcare bills, the medical expense deduction will help. For this tax year (2018) the Tax Cuts and Jobs Acts (TCJA) preserves the deduction for medical expenses, and changes the floor to 7.5 percent. Therefore you can deduct qualified medical expenses that are over 7.5 percent of your adjusted gross income for the year. The floor returns to 10 percent in 2019.
If you are hesitant about paying for health insurance because of the cost, it may be tax savvy to research some cheaper options. Experts predict that the Obamacare-era exchanges will still remain and offer reasonably-priced plans for now. In addition, the Trump administration’s proposal to expand the definition of what type of individuals or businesses can purchase ‘group” healthcare may create some less expensive, albeit less comprehensive, health insurance plans.
No matter what you decide about purchasing health insurance as a self-employed individual, using a Health Saving Account (HSA) for qualified medical costs can be helpful because it allows you to use pre-tax dollars to pay for them as long as you use the money you set aside within the time period allocated by your plan administrator.
Forgoing health insurance is a big decision. If you feel that you can’t afford health insurance or that your out-of-pocket expenses will be less than what you might pay in premiums, then not having health insurance in 2019 may save you a few dollars given that you will no longer be subject to a tax penalty for doing so. However, from a tax perspective, if have the misfortune of large medical bills, you are unlikely to see a tax win from a deduction standpoint if you opt out of an affordable health insurance plan and pay your bills yourself.
Whatever you ultimately do, be sure that you weigh all the factors involved in the cost vs. benefit analysis of paying for health insurance. That way you’ll know that your decision takes into account both your personal health needs and the health of your business.
Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.
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