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.

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.

Underestimating 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:

HSA contributions

Health Savings Accounts (HSAs) offer significant tax advantage s, 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 (FSA) 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.

Failing to report life changes affecting subsidies

Life changes can significantly impact your 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.

Mixing Medicare and Marketplace coverage

As you approach age 65, be careful with the interaction between Medicare and Marketplace coverage:

So, plan your transition from Marketplace to Medicare coverage to avoid gaps in coverage or tax complications.

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.)

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:

Open enrollment and taxes: 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.

(Kelley R. Taylor is senior tax editor at Kiplinger.com.)

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