Since open enrollment season is here, you're probably swamped trying to figure out which coverage is best for you or your family. But did you know that your benefit choices can potentially impact your tax situation?
Making informed decisions as you choose your coverage can help you optimize your tax benefits and avoid pitfalls.
So, here are some tax issues to watch out for during open enrollment.
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What is open enrollment?
It's good to review what open enrollment is before we look at some tax concerns. Typically occurring in the fall each year, open enrollment is a time when employees can review and modify their benefits selections for the coming year.
This usually includes health insurance, retirement plans, and other employer-sponsored programs.
Employees don’t need a qualifying life event to make changes during the open enrollment period.
ACA open enrollment
Annual income
One common tax issue with benefits coverage involves underestimating income for premium tax credits for Affordable Care Act (ACA) Marketplace health insurance plans.
These federal tax credits are based on your estimated income for the coming year.
So, if you underestimate your income, you may receive more tax credits than you're entitled to, leading to an unexpected tax bill when you file your return. (That’s because the premium subsidies are based on your actual income).
To avoid this:
- Carefully estimate your income for 2025, considering potential raises, bonuses, or changes in employment.
- If your income increases during the year, report the change to the Marketplace to adjust your premium tax credit.
- Consider taking only a portion of the advance credit if you're unsure about your income, as you can claim any additional credit when you file your tax return.
Failing to report life changes affecting subsidies
Life changes can significantly impact premium tax credits and cost-sharing reduction eligibility. So, report changes like marriage, divorce, birth or adoption of a child, or significant income changes to the Marketplace.
Not reporting these changes can result in you owing money when you file your tax return or missing out on additional subsidies you may be eligible for.
HSA limits 2025
Health Savings Accounts (HSAs) offer significant tax advantages, but misunderstanding the rules can lead to tax issues. The most important is to ensure you're eligible for an HSA by confirming you have a qualifying high-deductible health plan (HDHP).
Also, be aware of the HSA contribution limits for 2025 ($4,300 for individual coverage and $8,550 for family coverage, plus a $1,000 catch-up for those 55 and older).
Remember that HSA contributions are pro-rated if you're not eligible for all twelve months of the year. Exceeding contribution limits can result in excess contribution penalties and additional taxes.
Flexible Spending Account rules
FSAs also provide tax benefits, but they come with strict use-it-or-lose-it rules. So, plan your pre-tax FSA contributions, since funds you don't use are typically forfeited at year-end.
- Be aware of any grace period or carryover options your plan may offer.
- Understand which expenses qualify for FSA reimbursement to avoid potential tax issues.
Medicare open enrollment
As you approach age 65, be careful with the interaction between Medicare and Marketplace coverage:
- Once you're eligible for premium-free Medicare Part A, you are generally no longer eligible for premium tax credits in the Marketplace.
- Continuing to receive tax credits after Medicare eligibility can result in having to repay those credits when you file your taxes.
So, plan your transition from Marketplace to Medicare coverage to avoid gaps in coverage or tax complications. Medicare open enrollment, for those already enrolled in Medicare, runs from October 15 to December 7 each year.
Employer-sponsored coverage
If you have access to employer-sponsored health insurance, remember your premiums are typically paid with pre-tax dollars, reducing your taxable income.
But it’s worth noting how employer-sponsored coverage might impact your eligibility for Marketplace subsidies. In some cases, if your employer's coverage is considered affordable, you might not qualify for premium tax credits. (Various tests and standards apply.)
- An employer's coverage is considered "affordable" if the employee's share of the premium for self-only coverage doesn’t exceed a certain percentage of the employee's household income.
- For 2024, this threshold is 8.39% of household income.
- For 2025 it will be 9.02%.
So, consider any potential tax implications if you waive employer coverage in favor of a Marketplace plan.
Premium Tax Credit reconciliation
When you file your tax return, you'll need to reconcile any advance premium tax credits you received:
- Keep all relevant tax forms, including Form 1095-A, from the Marketplace.
- Be prepared to complete Form 8962 to reconcile your credits.
- Understand that significant differences between your estimated and actual income can result in either owing additional taxes or receiving a larger refund.
Open enrollment tax issues: Bottom line
By being aware of these potential tax issues and planning during open enrollment, you can make choices that optimize your health coverage while minimizing unexpected tax consequences.
Always consult a tax professional or benefits specialist if you have questions and pay close attention to open enrollment deadlines that apply to you.
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