Health care expenses, taxes: Not as simple as you think

In the past few years, the costs and regulations around health insurance have become inextricably entwined with federal income taxes. Leaving all the political debate aside, the Affordable Care Act is still very much in force. And it impacts the tax returns of millions of Americans.

Experts at TurboTax point out that although the health insurance portions of your tax return are far-reaching, complying with tax law shouldn’t be difficult if you are aware of the rules (or if you use their software).

Here are some basics to keep in mind.

Everyone has to report their health insurance status on the tax return.

There is a simple box to check, indicating you have health insurance. And the IRS is not just taking your word for it. Employees of large companies may receive a Form 1095-C along with the W-2 form. Those who are covered by Medicare or Medicaid may receive Form 1095-B. And those who purchased health insurance through the Affordable Care Act marketplace receive Form 1095-A, which lists the amount of any advanced premium tax credit, the subsidy you may have received to lower your premiums.

IRS computers may be a bit outdated, but they will have no trouble matching up these forms with the information on your tax return and determining whether they should claw back some of that premium support (if you earned more than you predicted when applying) or whether you should be penalized for not having insurance.

Exemptions are available.

There are more than 30 that can be found on the TurboTax blog or at Healthcare.gov. These exemptions can keep you from having to pay a penalty for not having health insurance. About 40 percent of those without insurance qualified for an exemption last year. Many exemptions revolve around “affordability,” while others include being incarcerated, having had your utilities shut off in the previous year, or having some other hardship situation.

There is an excellent tool to screen for potential penalty exemptions at Healthcare.gov.

Penalties are getting steeper.

At the beginning of the Affordable Care Act, many people figured it might be less expensive to pay the penalty than to buy insurance, with all its complexities. But for 2016, the penalty for not having coverage is $695 per adult, and half as much for children, or 2.5 percent of household adjustable gross income, whichever is greater, with the penalty capped at $2,085 for a family of four. In other words, it’s expensive not to have health insurance.

Clawbacks are possible.

Those who purchase health insurance under the Affordable Care Act are required to estimate their income for the year ahead, to determine the amount of any premium subsidy. That can be difficult if you are self-employed or if your income comes from commissions. If you project too little income, you may have to repay a portion of the subsidy. Subsidies were given if your projected income was less than 400 percent of the poverty level, or roughly $47,560 at the maximum. If your income is even $100 above that level, the entire subsidy can be reclaimed by the government. A last-minute IRA or HSA contribution, allowable until the filing date, might keep your income under that limit.

Don’t forget to deduct excess medical expenses.

If you’re under age 65, and medical expenses (including ACA premiums) exceed 10 percent of your adjusted gross income, they become deductible, and for those over age 65, the deduction begins when medical expenses are over 7.5 percent of AGI.

It’s not your imagination that health care insurance and tax law have combined to create a need for smart tax preparation, even for those with low incomes. And that’s The Savage Truth.

The Roth IRA turns 20 years old this year. The retirement vehicle was part of the Tax Relief Act of 1997, and it was seen as such a boon to savers that many believed that it would not survive. Two decades later, it is alive and well.

A Roth IRA is an individual retirement plan that allows participants to save for the future. Unlike other plans such as a traditional IRA or an employee-sponsored 401(k), contributions to a Roth IRA are not tax-deductible. They are made with after-tax dollars, but the money in the account grows tax-free. When you take a qualified distribution from your Roth IRA, you do not have to pay taxes on the money.

Not everyone can contribute to a Roth IRA; there are income limits. For 2016 tax filing season, you can contribute to a Roth IRA if you have taxable compensation and your modified adjusted gross income is less than:

$194,000 for married filing jointly or qualifying widow/widower (contribution reductions start at $184,000);

$132,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year (contribution reductions start at $117,000);

$10,000 for married filing separately and you lived with your spouse at any time during the year.

As with a traditional IRA, you can put $5,500 into a Roth every year. If you are over age 50, you can add an extra $1,000, for a total of $6,500.

As with a traditional IRA, you can start penalty-free distributions at age 59 1/2. If you want access to your funds earlier than that, Roth IRA withdrawal and penalty rules vary depending on your age. Generally speaking, because you have contributed an after-tax dollar into the account, you can withdraw contributions at any time tax- and penalty-free. To do so, you will need to keep spotless accounting records on your annual contribution amounts.

Five years must have elapsed since the tax year of your first Roth contribution before you can access the earnings (as opposed to the contributions, as discussed above) in the account without taxation. This rule applies to all owners, regardless of age. Presuming you reach the five-year hurdle, you can access funds after 59 1/2, but there are a number of exceptions that may allow you to access your Roth before age 59 1/2. For example, you can use Roth funds for a first-time home purchase (up to a $10,000 lifetime maximum), to cover qualified education expenses and to pay for unreimbursed medical expenses or health insurance if you’re unemployed or if you become totally disabled. Check the IRS rules for a rundown of qualified distributions and exceptions.

Unlike with a traditional IRA, you need not take a required minimum distribution from a Roth IRA. You never have to withdraw money if you choose not to do so. However, upon the death of a Roth IRA owner, the beneficiaries must take required minimum distributions, although the distributions remain taxfree.

The advantages of a Roth IRA are simple: If you are in a low tax bracket, the Roth allows you to pay taxes at your current rate, and when you take your distributions, you avoid paying taxes at your future (hopefully) higher rate. The Roth is also great for those who want to enjoy tax benefits during their lives and then be able to pass on funds that have already been taxed to their heirs.