Tax Credits for Health Insurance Premiums
Health insurance is often one of the largest household expenses. It can also be one of the most expensive employee benefits for small businesses to provide. To help protect against costs becoming prohibitive there are tax credits and deductions avaible to individuals, self-employed taxpayers and qualifying small businesses.
What is the Advanced Premium Tax Credit?
A Form 1095-A will show information about your health insurance costs and advance credits you received for health insurance obtained through the Health Insurance Marketplace. Anyone who receives health coverage through the Marketplace will receive this form. It reports information about the qualified health insurance coverage you had during the previous tax year. The form includes data such as:
- Who was covered
- The months for which health insurance coverage was in place
- Monthly premium amounts
- Advance premium credits received
- Costs for the second lowest cost silver plan offered in your area (this information is used to calculate the amount of the premium credit for which you qualify)
Important: Some people who receive health insurance coverage through the Health Insurance Marketplace need to file a tax return even if they would not otherwise be required to do so based on their income. Part III, Column C of Form 1095-A shows the amount you received in advance premium tax credits. If this column shows a number other than zero, then you must file a tax return even if you had little or no income during the year.
You will use the information on the 1095-A to complete a Form 8962, which allows you to claim the health insurance premium credit you qualify for on your tax return and reconcile that credit with any amount you may have already received through advance premium credit payments.
You do not need to file the 1095-A with your tax return. However, you will need the information it shows for everyone who accessed health insurance through the Health Insurance Marketplace that you include on your tax return. (Everyone in your family needs this information if they accessed health coverage through the marketplace, whether or not you include these people on your tax return.)
Information for some family members may appear on the same form while others may receive a separate form. For example, if some of your children received health insurance coverage through Medicaid or a state-run CHIP while you purchased non-Medicaid health insurance through the marketplace, their health insurance information will appear on a separate form than yours.
You may receive a digital version of the form or a paper copy, or both. You should not file your tax return until you have access to a version of this form, because you will need the information it contains in order to file accurately. (You may be able to access a digital version of the form before you receive a paper copy in the mail. Both versions are identical; if you are ready to file your tax return you can go ahead and do so before receiving a paper copy of the Form 1095-A as long as you are able to access the form digitally.)
What is the Self-Employed Health Insurance Deduction?
If you are self-employed and purchase health insurance, no matter if it is for yourself, coverage for your spouse, dependents or non-dependent children, you may be eligible to deduct the premiums cost on your personal tax return.
Group health insurance is one of the most valuable benefits of being an employee; the thought of losing access to that coverage might have caused you to hesitate before going out on your own as a self-employed worker.
But while you may not be able to get that same group health insurance, as a self-employed taxpayer you have one nice perk that’s not available to W-2 employees: You may be able to deduct the cost of premiums for health, dental and long-term care insurance coverage for yourself, your spouse and/or your dependents. To claim the self-employed health insurance deduction:
- You must have net business income that is equal to or exceeds the amount of your deduction. If your net earnings are less than the amount you paid in premiums, then your deduction is limited to the amount of your net earnings.
- You must not have access to another health insurance plan offered by your (or your spouse’s) employer. If you had access to another health insurance plan for part of the year, you may claim the self-employed health insurance deduction only for insurance premiums you paid during the months in which you did not have access to other coverage.
- Your insurance policy can be in your name or the name of your business.
- You may deduct the cost of insurance premiums you pay for coverage for your children who are under the age of 27 at the end of the tax year even if you do not claim them as dependents.
If you qualify, you can report the amount you paid in health insurance premiums on Line 16 of Schedule 1, Additional Income and Adjustments to Income. The premium costs that you enter on Schedule 1 reduce your taxable income. You must file Schedule 1 with your tax return to claim the deduction.
You can claim any insurance premium costs you did not include in the self-employed health insurance deduction (for example, if your insurance premiums exceeded your net business earnings) as an itemized deduction on Schedule A if they meet the rules for qualified itemized deductions.
Important: The self-employed health insurance deduction is a personal deduction and not a business expense. Do not enter health insurance expenses on Schedule C, Form 1065 or any other business tax return forms.
What is the credit for Small Employer Health Insurance Premiums?
If your small business pays for health insurance for its employees (either in part or full), you may be eligible to claim a credit for some of the costs related to the employee coverage. To encourage business owners and non-profit organizations to provide health insurance benefits for their employees, the federal government offers a tax credit to partially offset the cost of premiums for eligible small employers.
If you are eligible for this credit, you can claim it by completing Form 8941, Credit for Small Employer Health Insurance Premiums and submitting the form with your tax return. (Tax-exempt employers must submit Form 8941 with Form 990-T, Exempt Organization Business Income Tax Return. These organizations must file form 990-T to claim the small employer health insurance premium credit even if you would not otherwise be required to do so.)
To qualify for the credit your business or tax-exempt organization must:
- Have fewer than 25 full-time equivalent employees
- Pay average wages that are under the inflation-indexed annual rate set by the IRS
- Offer a qualified health plan for employees through the Small Business Health Options Program Marketplace (or qualify for an exception)
- Pay at least half the cost of employee-only health care coverage for each employee (The business does not have to pay half the cost of coverage for employees' dependents or family coverage in order to qualify.)
Important: You can only claim the small employer health insurance credit for a two-year period, and those two years must be consecutive.
If you qualify, the small business health insurance premium credit can significantly reduce the cost of offering insurance to your employees. The amount of the credit is determined using a sliding scale, with the smallest employers receiving the largest credit. The maximum credit is worth 50% of premiums paid for qualified small businesses or 35% of premiums paid for qualified tax-exempt employers.