What You Need to Know About Insurance at Tax Time
It’s tax season once again. As this year’s April 18 filing deadline fast approaches most Americans are probably busy gathering important financial documents, expense receipts, and tallying up their deductions.
But, according to some analysts and experts, Americans also should consider important insurance matters that might apply to this year’s filing process.
When it comes to taxes and insurance, “there are a few important considerations to keep in mind going into April,” says tax and business attorney Barbara Weltman, who is the author of J.K. Lasser’s Your Income Tax 2017 and J.K. Lasser’s Small Business Taxes 2017.
Here are some tips from insuranceQuotes on how to make sure you’ve got your health, life, home and auto policies in order before April 18.
Health insurance and taxes
No other insurance product is as closely tied to personal income taxes as health insurance. When the Affordable Care Act (ACA), also known as Obamacare, was passed in 2010, one of its most hotly debated inclusions was the individual mandate requiring every American to obtain health insurance by 2014 or else pay a fine assessed on one’s annual tax return.
According to HealthCare.gov, the 2016 penalty for not purchasing minimum essential coverage is either $695 per adult and $347.50 per child (a maximum penalty of $2,085 per family), or two-and-a-half percent of one’s annual household income (whichever is greater).
As of right now that mandate and its penalty are still in place. However, recent political upheaval about potentially repealing and replacing the ACA has left the future a little uncertain for many Americans.
“We simply don’t know what the impact of the [Republican] promise to repeal and replace will mean in terms of 2016 returns,” Weltman says. “In other words, will people be penalized or not for failing to have coverage in 2016? Who knows? But I would proceed as though nothing has changed yet.”
Regardless of Obamacare’s future, Weltman says there are some important considerations regarding health insurance as you prepare to file your taxes.
For starters, if you and your family received health insurance through your employer, those benefits are not taxable. However, there are some nuances to consider if you are self-employed or if you purchased health insurance through a state or federal marketplace.
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“If you’re self-employed and you purchased your own health insurance in 2016, you will deduct the premiums from your gross income. That also applies to spouses and dependents,” Weltman says. “And you don’t have to itemize to take that deduction. It’s considered a personal expense that’s an offset to income.”
However, if you aren’t self-employed but still purchased your own health insurance — perhaps because your employer provided a mediocre plan or didn’t provide one at all — you then have to itemize to receive a deduction.
Weltman also stresses that if you were covered by a high deductible insurance plan through a state or federal exchange in 2016 and you don’t qualify for Medicaid, you can put money into a tax-deductible health savings account.
“The deadline for putting money into that account is April 18 of this year,” Weltman says. “So even though the previous tax year is over you can still fund that account for 2016 over the next month and a half.”
As a sidebar to health insurance, Weltman points out that long term care insurance can be deducted as an itemized deduction on schedule A, provided it exceeds 10 percent of your adjusted gross income, or 7.5 percent for those 65 and older.
Life insurance and taxes
The bad news is that any life insurance premiums you paid in 2016 are not tax deductible. The good news, however, is that payouts to beneficiaries are not subject to taxation — with two exceptions.
“Life insurance benefits are often tax-free, so your beneficiaries generally won’t be charged tax on any benefits they receive after your death,” says Joshua Zimmelman, owner of New York-based Westwood Tax & Consulting. “However, they might be charged if your employer paid your premiums for a group life insurance program through your job.”
They might also be taxed, Zimmelman says, if you owned your own policy and the benefits put your estate’s value over a certain estate tax threshold — an exception that only applies to children and other beneficiaries, not spouses.
Anthony D. Criscuolo, certified financial planner and portfolio manager with Palisades Hudson Financial Group, says the value of life insurance is considered part of the gross estate of the owner of the policy for estate tax purposes.
If someone had a very large life insurance policy, however, it could push the value of his or her taxable estate high enough to trigger an estate tax at the death of the policyholder.
“The estate tax is totally separate from the income tax. That means the life insurance proceeds are not taxable to the named beneficiary for income tax purposes,” Criscuolo says. “But they could be taxable as part of the overall estate tax return filed on Form 706. Of course the federal estate tax exemption amount is for anything less than $5 million, so the estate tax is not an issue for most taxpayers.”
Home and auto insurance at tax time
When it comes to homeowners and auto insurance policies, the tax implications are fairly straightforward. Premiums aren’t tax deductible and payouts for claims are not subject to taxation.
“Homeowners and auto insurance payouts are generally tax-free because the IRS considers them to be reimbursement rather than income,” Criscuolo says.
However, there occasionally may be tax consequences if you deduct your property as a business expense, or if the insured house is an investment property. In these instances, says Criscuolo, it is best to consult a tax professional.
“For personal vehicles and primary residences, however, policyholders who receive a payout are generally in the clear,” he says.
