How Your Insurance Impacts Your Taxes
Tax season somehow always sneaks up on us. And even with an extra month this year — taxes are now due May 17th — we know we'll somehow still end up scrambling to get everything submitted. So besides just generally enjoying complaining about taxes (a universal right), you might wonder why we’re covering taxes on our insurance-focused blog. It turns out: your insurance does factor into your taxes.
To begin with, depending on the type of insurance and your personal details, individual policies can influence your tax bill. For example, you might be able to deduct some of your renters insurance premiums if you have a home office that you only use for business purposes. The same might apply to auto insurance if you use your car for business reasons. Keep in mind that the rules vary state by state and individual by individual, so we recommend that you speak with your provider to find out specifics.
Health insurance, however, is one that will apply to the majority of us.
First and foremost, there are penalties to consider. Unlike past years, if you didn’t have coverage in 2020, you won’t need an exemption to avoid paying fees. But - and it is a big but! - some states do have their own health insurance mandate. If you live in one of these states, such as California or Massachusetts, and you’re not covered, you could face penalties if you don’t apply for an exemption.
Are there ways health insurance can benefit my tax filings?
If you’ve enrolled in a high-deductible health plan (HDHP), one way to reduce your tax bill is to contribute to a health savings account, also known as an HSA. These can be used to “pay or reimburse certain medical expenses you incur.”
Put simply: if your insurance plan meets the requirements to be considered an HDHP, you can make tax-deductible contributions to your HSA, allow your money to grow, and take tax-free withdrawals to cover eligible expenses. For 2020, if you have an individual-only high-deductible health plan, you can contribute up to $3,500. If you have a family high-deductible health plan, you can contribute up to $7,100. Remember that contribution deadlines are based on the tax year. In past years, HSA holders have had until April 15 to make contributions for that tax year; this year, the tax deadline has been extended, but the IRS has yet to confirm if this also changes the HSA deadline. So until we hear otherwise, we recommend funding your HSA in line with the April 15th deadline.
Another option is to contribute to a flexible savings account, or an FSA. Note that the only way to get an FSA is as part of an employee benefits package, so the self-employed unfortunately cannot participate. FSAs are also tax-free, but unlike HSAs, you can’t invest your contributions or roll them over from year to year.
The great benefit of an FSA, however, is that the money can be put towards childcare, which isn’t allowed with an HSA. You can currently allocate up to $2,700 per year in an FSA, but in most cases, the money must be spent within the calendar year. Because any unspent money at the end of the year isn’t yours to claim back, you’ll want to take extra care to calculate the correct amount when filing your taxes.
We can all agree that taxes are confusing and generally fall into the “not fun” category. However, adding insurance into the mix when you file your taxes doesn’t have to be a headache.
- First, we recommend that you check in with your provider to make sure you understand the specifics of any individual policies you may hold, since deductions differ between the fifty states.
- When it comes to health insurance, we encourage Marble members to look into how different policies could benefit them — if not this tax cycle, then the next one.
- Selecting the right health insurance plan is an important investment in your health and your finances, and the impact of your choice will be felt well beyond your annual visit to the doctor’s office.