Health Insurance and Taxes: Get Financial Help and Avoid Penalties

When the federal government encourages you to lower your tax bill, it is an offer that should not be taken lightly. Have you known the benefit of getting tax credits? Benefitting from tax credits doesn’t only lower your tax bill but gives you a cash refund which you can use to pay for your health insurance premium. But before we can understand better, let’s see how your health insurance application relates to your taxes.

The federal government in America offers health insurance tax credits. If you have applied for health insurance, there is no doubt you are paying for its monthly premium. The government helps those paying health insurance premiums for tax credits. And the tax credit can serve more than tax exemption and reduction. 

Premium Tax Credits Explained

A premium tax credit or simply tax credit is a credit you can use to pay less for your health insurance. This monthly insurance payment is called ‘premium’. But you can only get a premium tax credit when you purchase health insurance coverage through Covered California, a state’s online marketplace for health insurance. The household information (members in the family) and income estimate are crucial requirements to apply for a tax credit because this will dictate how much credit you will be getting.

You have two options to receive your tax credits:

  1. Advance—You can choose to have some or all of your credit cover for your monthly health insurance plan. For the unpaid portion, the IRS will pay for it.
  2. Later—With this choice, if you want to claim your tax credit during tax time or at the end of the year, you must pay your premium in full each month.

When you opted for the advance payment of the tax credit, but your income is less than the amount you are qualified for, you must pay the difference when filing your federal ITR. But if you opted for less premium tax credit than you are eligible for, you will get a refund when you file your ITR.

Who Is Qualified for a Tax Credit?

You and your family may be eligible for a premium tax credit if:

  • You don’t have health insurance from your employer
  • You aren’t qualified for health insurance like Medicaid
  • You are income-eligible
  • If married, file your taxes jointly
  • You should purchase a health insurance plan from Covered California

What is Covered California?

Established under the Patient Protection and Affordable Care Act, Covered California is a health insurance marketplace for California families to get low-cost or free insurance. The insurance coverage enables you to apply for financial help that you can use to pay for the health insurance premium. The government, through Covered California, offers a tax credit that you can use to lower the tax you owe; it is better than getting a tax exemption. And this privilege is open to individuals, small businesses, or independent contractors. 

What is the minimum income to qualify for Covered California?

Covered California has salary restrictions and income guidelines for one to qualify. You or your family qualifies for government assistance based on your declared income. If you wish to know the Covered California income limits, go to their site.

If you are applying for help, whether you qualify or not, the amount you get will depend on the estimated income for a year, the number of members declared in your tax household, your age, and your ZIP code. Remember this information is vital information on your tax credit application. If you want to know how much financial help you can pay for your health insurance, check Covered California’s interactive calculator.

Keep in mind that this financial help you are applying for is either a monthly reduction of your health premium or a lump sum at tax time.

The good thing about getting a premium tax credit is that you can claim it in advance. It means that the federal government will right away cover part of the monthly premium; let’s say for $300, the federal tax credit will be $240, which goes directly to your health plan. Now, the difference of $60 is what you will only pay. So low, right?

What you declare to your income when filing your taxes may be higher or lower than the actual income you received for the year. If this happens, you need to tell the IRS your ‘actual’ earnings for that year when you file your tax return.

The IRS will conduct a reconciliation of your premium tax credits if the estimated income or family size is different from what’s written on your tax return. If the reported income on the tax return is higher than what you would have earned in a given year, you will be getting a lower premium credit. Being so, you will get an additional tax credit, which you can use to lower the taxes owed to the IRS. But if there isn’t any tax owed, you even get a refund.

The same thing will occur if your income estimate is lower than what you earned for that year. However, this time, you have to pay the difference to the IRS during the filing of taxes. So, if ever you have a tax refund, it will cover the tax you owe.

How about Small Business Owners and Self-Employed, Can They Get Financial Help?

Independent contractors and small businesses can also apply for tax credits to cover their health insurance premiums but on a different scheme. According to the IRS under Topic No. 502 Medical and Dental Expenses, you may be eligible for the health insurance tax credit if you are an independent contractor or an owner of a small business. The premiums you paid for the health insurance policy for yourself, your spouse, and your dependents are adjusted to your net profit for the year. Refer to Publication 535, Business Expenses to understand more about the eligibility of dependents.

Are There Penalties? How Can You Avoid Them?

Using Covered California to purchase health insurance offers rewards to individuals and companies. You or your family could owe the IRS for not having health insurance coverage for the entire year. The penalty arises when you don’t buy any health insurance whether from Covered California or elsewhere. You can refer to the California Franchise Tax Board for specifics of penalties. But the tax penalty is at least $750 for each adult in the household, plus 50% of the said amount per dependent (not adult) when you file your tax return.

To prepare for this, use the penalty estimator tool found on the website of the Franchise Tax Board. Much better, check the list of exemptions to the penalty to claim when you file your tax return.

The reason for applying for exemption is to avoid paying penalties for not having health insurance. You need to fill up an exemption application through Covered California, and it is subject to approval.

You can apply for the following exemptions:

  • General hardship
  • Affordability hardship
  • Religious conscience

Laying all this information could serve as your financial guide for one aspect only–health insurance tax premium credit eligibility. Regarding spending and hoping for credits, this financial advice is a win-win solution. First, having health insurance is something you and your family need that will protect your life. Second, the federal government has your back in case you find yourself inadequate to pay for health insurance, thus offering you coverage through tax credits. And finally, you can even claim a tax refund, offset your tax liability using your credit, and lower your income tax at the end of the year.

Won’t you find this help a little more than generous?