When you are a self-employed freelancer, the decisions you make about healthcare coverage can have a critical impact on not only your own physical well-being, but your financial health, too.
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.
While not everyone who chooses to opt out of Obamacare-era plans is self-employed, many people are.
Here is what not having health insurance looks like from an income tax perspective:
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.
What are your options?
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.
Weigh all the factors involved
Forgoing health insurance is a big decision for freelancers. 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 you 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 freelance business.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com which also features a new blog, how-to articles, and a comprehensive freelance tax guide.
Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available Jan. 1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.