Health coverage and tax exemptions.
According to the individual shared responsibility provision of the Affordable Care Act, you and the members of your family must have the qualifying health coverage. In case there is no coverage available for each month, you would have to make a payment called an Individual shared responsibility payment at the time of filing the Federal Income Tax return.
However, there are some taxpayers who qualify for an exemption from the requirement of making the above-mentioned payment. The major causes for this exemption can be:-
- Those taxpayers might not be having access to the health coverage which is affordable,
- Those taxpayers might have had a coverage gap which is less than three calendar months or
- Those taxpayers have low income and expansion of Medicaid was not done by their respective states.
Moreover, there can be some taxpayers who would have health coverage or would qualify for the exemptions for some months and would owe payments for other months.
The Interactive Tax Assistance Tool of the IRS helps in the determination of your eligibility for a coverage exemption or your responsibility for making the payment of individual shared responsibility. The exemption might have been obtained anywhere; it must be reported by you on Form 8965, Health Coverage Exemptions while filing your Income Tax Returns.
Health Coverage Exemptions
The list of some of the available major health coverage exemptions is mentioned below.
Unaffordable coverage –
The available health coverage you have would be considered unaffordable. Your coverage would be considered as unaffordable when the lowest amount which you must have paid for the employer-sponsored coverage or for the coverage that has been obtained by the Marketplace is much more than a particular percentage of the household income you have for the year.
General hardship –
This means that you had experienced certain circumstances which prevented you from availing the health coverage under a qualified health policy. These circumstances can be eviction, homelessness, domestic violence, foreclosure, unpaid medical bills, etc.
Short coverage gap –
This would mean that you were without any coverage for almost three consecutive months during a year.
Income below the return filing threshold –
This exemption means that your gross income lies below the minimum threshold needed to file a tax return.
Certain noncitizens –
This exemption is for those who are not US citizens and are not present in the country as per the laws. You can qualify for this exemption even if you are having a Social Security number (SSN).
A resident of a state which did not expand Medicaid –
The income of your household is below 138 percent of the federal poverty line for your family’s size. Moreover, during any time of the year, you resided in a state which did not participate in the Medicaid expansion.
Members of the Indian tribe –
This health coverage exemption is available for you when you are a member of a Federally-recognized tribe of India or were eligible for services from an eligible Indian health care service provider.
How to report the coverage exemptions which have been obtained from the Marketplace?
If you are obtained health coverage exemption from the Marketplace, then you would receive an Exemption Certificate Number (ECN). You can report this exemption by entering the ECN in Part I of your Form 8965, Health Coverage Exemptions in Column C. In case, your application for health coverage exemption has not been processed until your time of filing tax returns you must complete Part I of your Form 8965, and your Colum C must have the entry as “Pending”.
Procedure to obtain coverage exemption.
- Some of the health coverage exemptions can be easily obtained by applying in the Marketplace. However, there are some which can be obtained by filing a tax return.
- In case, you have an income which is below the minimum limit for filing a tax return you would avail exemption from making individual shared responsibility provision. You are not even required to file the federal income tax return for claiming the exception. But, if you are filing a tax return then you must claim a health coverage exemption with your return.
- You can claim health coverage exemptions on Form 8965, Health Coverage Exemptions, and attach this to Form 1040, Form 1040A, or even Form 1040EZ.
The process to claim coverage exemptions with the IRS
- In case, your household income is below your tax filing threshold and you are filing a tax return then you must use Part II of Form 8965, Health Coverage Exemptions.
- The other exemptions are usually claimed on Part III of Form 8965.
- You must file only one Form 8965 along with your Forms 1040, 1040A, or 1040EZ for reporting all the health coverage exemptions for yourself, your spouse as well as your dependents.
So, these basic details on health coverage and tax exemptions would help you in understand the process better.
Tax deductions for your child born in the US.
When the deadline for the tax return filing approaches, you should keep your details ready for review so that you do not miss any necessary detail. If you have a kid, then it is feasible that you can obtain some good tax benefits.
If you are going to claim your child as a dependent, then there are certain dependency requirements which your child must meet.
- Your first step is applying for the Social Security Number of your baby. It will take nearly two weeks for your Social Security Number to arrive.
- Another criterion is that your child should have been living with you for a period of more than half of the year. The time which your newborn child has spent in the hospital would not be taken into consideration here.
Changes in your tax filing status.
- In case you were single and now after having a baby you are supporting your household, your tax filing status would change to “Head of the Household”.
- By this tax filing status, you would be able to obtain a much larger standard deduction and even more favorable tax brackets.
- So, you can save more on your taxes after being the Head of Household than you were saving while you were Single.
- However, when married and having a child your filing status would not change.
Child Tax Credit.
This is considered to be one of the best tax breaks for the parents. You can claim Child Tax Credit up to $1000 for each qualifying child.
Some criteria must be met for your child to be the qualifying child.
- Relationship – If you are going to claim this credit, then your biological children, foster children, adopted kids, step-children are eligible. Moreover, some of your other family members can also qualify.
- Age – Your children must be of the age of either 16 years or younger than that to avail of this credit.
- Dependent – You will have to claim your child as your dependent on the federal taxes.
- Support – Your child should not have been provided half of the support.
- Resident – Your child should have stayed with you for nearly half of the year or more.
- Citizenship – Your child can qualify if he is a US citizen, US resident alien, or a US National.
Claiming the tax breaks for medical expenses and child care.
- Medical expenses related to the birth of your child and child care are deductible.
- These expenses are deductible only when they are exceeding 10% of your AGI (Adjusted Gross Income).
- To qualify these expenses for deductions, these expenses must be itemized.
- If you are a working parent, then you are eligible to claim credit for Qualified Child Care Expenses.
- You can also claim the Child and Dependent Care Credit if you have paid some worker or Daycare center for taking care of your child while you were working.
- To qualify for this credit, you should be able to identify the individual who has given support or taken care of your child. You and your spouse should have earned income to avail of this credit if you are filing the returns jointly. Moreover, the expenses paid for child care should not be given to your spouse or any other dependent on your tax returns.
- This credit is based on your income and can exceed up to 35% of the child care expenses which qualify for a credit. This can be up to maximum expenses of $3000 for one child and $6000 for more children.
- However, your Child and Dependent Care might get reduced if your employer is providing you with dependent care benefits that are tax-free.
Some additional tax breaks.
There are some other tax breaks which parents can enjoy such as:-
- You can qualify for obtaining the Earned Income Tax Credit.
- Any gifts i.e. in the form of money or property would be free of tax for you and your kid if received from grandparents and other relatives.
- You can also be eligible to participate in QTP i.e. Qualified Tuition Program which is being offered by your State. Even though there is no immediate break for the taxes, the earnings in the account would be tax exempted. You could also obtain state deduction or credit for the contributions made.
So, these factors would help you to understand the different facets related to the tax deductions associated with your child born in the US.
How can a qualified tax professional help you e-file your taxes amidst the pandemic to maximize your refunds?
How can a qualified tax professional help you e-file your taxes amidst the pandemic to maximize your refunds?
By hiring qualified tax professionals for your tax preparation, you are free from the stress of preparing the tax returns alone. The expertise of qualified professionals would ensure that you obtain all the deductions and credits which you are eligible to receive. You can gain peace of mind, avoid making mistakes while filing tax returns, and also save your time by hiring qualified tax professionals.
Currently, the pandemic COVID-19 has created mayhem all around and has affected the economic condition of the entire country. Several businesses have been shut down and millions of Americans have lost their sources of livelihood. In such a deteriorating situation, obtaining a considerable amount of tax refund would be very helpful to ease the financial stress for some time.
If you are preparing your tax returns with the help of a qualified tax professional, your tax preparer would suggest you several methods to e-file by which you can obtain maximum tax refunds.
So, let us have a look at some of the methods to e-file suggested by your tax professionals for getting maximum tax refunds.
a.Claim all available tax deductions
Your tax preparer would suggest you to dig into all available tax deductions. There are many common deductions available such as charitable donations, medical costs, interest on mortgage and education expenses, etc. The deductions would be subtracted from your AGI (Adjusted Gross Income) thus, lowering your taxable income. As your taxable income would be low, you would have to pay fewer taxes and you can obtain higher refunds.
However, there are some deductions which you might not be aware of or are very easily overlooked such as State Sales Tax, Student loan interest, Out-of-the pocket charitable contributions, Certain jury duty fees, Child and dependent care, Reinvested dividends, State income tax paid on returns of last year, Earned Income Tax Credit (EITC), etc. You must keep good records of your deductions especially in case of charitable contributions. Moreover, your tax preparer would suggest you to ensure that you are claiming deductions for those organizations which have the status of “Tax-exempt” with the IRS.
b.Maximize your contributions made to IRA and HSA
Your tax preparer would suggest you maximize your contributions which you are making towards the IRA and the HSA. Traditional IRA contributions can help reduce your taxable income. The contributions made towards Roth IRA do not qualify for tax deductions but they can qualify for Saver’s credit if you can meet the income guidelines. In case, you are self-employed you can be able to contribute towards a certain self-employed retirement plan till 15th October 2020.
Your pre-tax contributions to an HSA can also help lower your taxable income. Your tax preparer would suggest you to contribute more towards your HSA before the timelines are closed. You should have enrolled in a health insurance plan which has high deductibles that either meet or exceed the required amounts of the IRS.
c.Use of best filing status
One of the major factors which can maximize your tax refunds is the choice of your filing status. You must inform your tax preparer about any of your major life changes before e-filing. Your relationship status on 31st December of a year determines your entire year’s filing status and you must use it while filing your tax returns. These options for filing status include Single, Married and filing jointly, Married and filing separately, Head of household or qualifying widower. If you could file your tax returns using two statuses such as “Single” and “Head of Household”, your tax preparer can calculate your taxes and find out which one would be beneficial for you in terms of more returns.
d.File your tax returns on time
Your tax professional would always suggest you to file your tax returns on time. This increases your chances of getting a maximum refund. The only exception to this is the case in which you have filed for an extension in the timeline to file your tax returns. The IRS charges penalties for not being able to file your income tax returns on time. Your penalty would be around 5% of your unpaid taxes for each month late up to 5 months from your tax filing deadline. Moreover, if you are not paying your taxes on time the IRS would charge penalties and interest on it. If there are penalties and interest levied by the IRS, then it is quite obvious for you to obtain low tax returns.
e.Report all your income
Many people do not report all income on their return. This can be intentional or unintentional but the IRS would charge penalties for this. If IRS uncovers your unreported income then it would charge penalties and interest on your unpaid taxes. Your tax professionals would suggest you to spend some extra time in reviewing your returns and make sure that you are not forgetting any source of income. Usually, the sources of income that are overlooked are the interest income, income from dividends, contract work, 529 contributions, charitable gifts, etc. You can maintain a spreadsheet and keep on updating your income sources every year to avoid mistakes while tax preparation.
Hence, with the help of these tips and methods, you are sure to maximize your refunds during these difficult times. If there is an error after filing your tax returns which would affect your refund amount, you can amend your return by filing Form 1040X.
Health Insurance Tax Deductions for an NRI in the US
As we all know, health expenses can be highly expensive so having health insurance and being able to claim a tax deduction would help save tax up to a certain extent. However, for an NRI residing in the US claiming health insurance for tax deductions depends on certain conditions. It depends on the health care services and the expenses incurred by the NRI in health insurance.
NRI Health insurance premiums and medical expenses can be tax-deductible only if they are paid out-of-pocket. Moreover, the financial condition of the NRs and from where health insurance has been received are two important factors in determining if the costs would be tax-deductible or not.
Can Health Insurance Premiums for NRIs be deductible on Federal taxes?
The Health Insurance Premiums for NRIs are classified as deductible on Federal taxes as these are the monthly payments made for the coverage which can be termed as “Medical Expenses”. There are various sources from which health insurance can be obtained by an NRI and the scope of these expenses being tax-deductible.
a.When health insurance is sponsored by an employer
The premiums for the health insurance policies sponsored by the employer are not tax-deductible. Employers would deduct the premium payment from the NRI’s payroll on a pre-tax basis. So, the employee contributions are already taking the tax-saving advantage and further deduction is not allowed. Moreover, the contributions made to HSA (Health Savings Account) are paid by the NRI on a pre-tax basis and would not be tax-deductible.
In the case of COBRA insurance, an NRI can continue the employer-sponsored coverage even though he is no longer working in that organization. The premiums for COBRA insurance are tax-deductible because an NRI would pay that entirely by himself on an after-tax basis.
c.When health insurance has been purchased through an insurance marketplace
In this scenario, the health insurance premium of the NRI would be tax-deductible as these would be termed as “Medical Expense”. Suppose, an NRI is eligible to be enrolled in his spouse’s health insurance program which is employer-sponsored but he opts out for that coverage then he will be unable to avail the tax deduction.
The premiums for Medicare plans depending on the plan the NRI selects such as Medicare Part B, C, or D plus Medigap would be eligible for a tax deduction. In the case of Medicare Part A, the expenses would not be tax deductible if the premiums have been paid by Social Security.
How to claim tax deductions for health insurance?
There are two options offered by the IRS to claim tax deductions for health insurance by the NRIs.
- Standard Deduction
- Itemizing the Medical Expense
In both cases, the AGI (Adjusted Gross Income) of the NRI would be reduced and the tax to be paid would be mitigated.
If an NRI is opting for Standard Deduction, then he would not be opting out for Itemized Deductions by default. By Standard Deduction, the process of tax preparation becomes quite easy and simple. The rates for Standard Deduction in case of NRIs can be listed below.
- Single Taxpayers – $12,400
- Married taxpayer filing return jointly – $24,800
- Married taxpayer filing return separately – $12,400
- Head of Household – $18,650
In case an NRI decides to opt for itemizing the health insurance, then currently in 2020 he can only deduct those medical expenses which are allowable and exceed 10% of his AGI.
An NRI can easily decide on choosing Standard deduction or Itemization of Medical Expense by having a look at his Schedule A 1040 Form. This would give him a chance to compare his itemized expenses with Standard Deduction and decide on which one to opt for.
Health Insurance Deduction for Self-Employed NRIs
In case of an NRI being self-employed then his threshold for permissible medical expense deduction lowers down to 7.5%. Suppose, the AGI of an NRI is around $100, 00 then medical expenses which would exceed $7,500 would be eligible for tax deductions.
Those NRIs who are independent contractors can also claim the health insurance deduction under the Self-employed category. By this, a self-employed NRI’s AGI can be directly reduced by health insurance premiums.
What can and cannot be deducted from tax?
The IRS would allow for any medical expense that has been paid from the pocket prescribed by the doctor for a tax deduction. Some of the common expenses included under this list are Medical tests, Dental Insurance, Therapy, Crutches, Hearing Aids, Birth Control, Prescription drugs, etc. In addition to these expenses, some other expenses which include travel costs for health care are also tax-deductible.
However, some expenses are not tax-deductible such as co-pays, Premium tax credits, expenses related to cosmetic surgery or hair transplant, or expenses related to non-prescribed drugs, etc.
As an NRI in the US, can you claim a Tax Deduction for your Health Insurance?
In today’s times, health insurance has become a basic necessity of life. With the spread of dreadful diseases across the world and the cost of medical facilities soaring high, health insurance is a must for every individual. By a health insurance policy, the insurance provider would meet the medical expenses that are incurred during any type of treatment undergone by the health insurance policyholder. For availing this, the policyholder will have to pay the health insurance premium regularly. As an NRI in the US, can you claim a Tax Deduction for your Health Insurance.
NRIs who are living in the US and are working sought to purchase health insurance to avoid any financial emergencies at the times of medical emergencies.
NRIs enrolled in an employer-sponsored health insurance plan
- When an NRI in the US has taken a health insurance plan which is sponsored by his employer then the premiums which are paid for the health insurance plan are already tax-free. However, if the premiums for the health insurance plan are made by a payroll deduction plan and the premium payment is done by pre-tax dollars then a tax deduction cannot be availed.
- Payroll deduction plans are those in which the employers of the NRIs withhold money from their paychecks for the benefits. These plans can include those for Medical insurance, life insurance premium, and retirement savings, other taxes, etc.
Tax deductions for unreimbursed expenses of NRIs
- In the case of NRIs purchasing their health insurance on their own by using after-tax dollars, some tax deductions can be done on the health insurance premiums.
- In the year 2019, NRIs would be allowed to deduct any qualified unreimbursed health care expenses that they have paid for themselves, their spouses, or dependents if the expenses exceeded 10% of their AGI (Adjusted Gross Income).
- However, in the year 2017 and 2018 if the healthcare expenses were more than 7.5% of the AGI of the NRI then it would qualify for a tax deduction.
- Apart from the health insurance premium, other expenses which can be included in this category by the NRIs are any expenses which are out-of-the-pocket such as expenses involved in surgeries, doctor’s visit, mental health care, vision care, etc.
- If an NRI is interested in making deductions for the medical expenses it is advisable to itemize the deductions. The NRI must ensure that his total itemized deductions would exceed the standard deduction amount.
Tax deductions for self-employed NRIs
- For self-employed NRIs living in the US, the entire health insurance premium can be claimed as a tax deduction. This deduction claimed by self-employed NRIs can be said to be a write-off to their personal income tax and will not be deducted when the NRIs are filing on the behalf of any of their businesses. For instance, a sole proprietor must enter the deduction amount in Form 1040 and not in the Schedule C Form.
- But, if an NRI is self-employed and also has another job at the same time then he can preclude from this tax deduction.
- If a self-employed NRI receives health insurance coverage through his spouse’s health insurance plan which is employer-sponsored, then he can also preclude himself from the tax deduction that can be availed by self-employed NRIs.
- Self-employed NRIs are not eligible to claim more deduction than the amount of income they are making through their work.
- Self-employed NRIs can choose any one of their businesses as the sponsor for their health insurance plan. It is not permissible for self-employed NRIs to add up their income generated by different companies to claim the maximum deduction. So, it would be wiser if a self-employed NRI would choose his most profit earning business as the sponsor for his health insurance plan.
Reducing of tax bills by NRIs
If an NRI does not qualify to make tax deductions for his health insurance either because of the cost threshold or due to the choice of taking the standard deduction, then he can choose another alternative method for reducing his tax bills.
By electing an HDHP i.e. high-deductible health plan, NRIs can avail the benefits of paying less premium for health insurance plans than normal plans. Through this, NRIs would be able to open a Health Savings Account (HSA). The money which is put into the HSA can be utilized for paying off the health care expenses which are out-of-pocket. The contributions made by an NRI towards the HSA are tax-deductible and when these are used for eligible expenses the withdrawals also become free. In some cases, the health insurance premium can be paid off by using the funds in the HSA.
However, HDHP can offer tax benefits to the NRIs but they are only advisable for the younger masses that do not need health care cover except some health emergency. It is not advisable for those masses that already have pre-existing health issues or are expecting health expenses shortly.
Hence, tax deduction by NRIs for health insurance can be made by thinking wisely and by taking into account the major criterion such as the type of employment and type of health care expenses incurred by the NRIs.