The Self-Employment Health Insurance Deduction

Rules and Limitations of the Self-Employment Health Insurance Deduction

Pharmacist handing woman medication
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One of the many perks of being self-employed is that you can deduct what you spend on health insurance premiums "above the line" on the first page of your tax return. Employees can claim medical expenses as deductions, too, including health insurance premiums, but they must itemize on their tax returns to do it, and this isn't always a good deal for everyone. 

If you have self-employment income, you can take a deduction for health insurance expenses incurred for yourself, your spouse and your dependents.

Self-employment income is reported on Schedule F if you're a farmer, or Schedule C. General partners in a partnership and actively participating members in an LLC that's treated as a partnership can claim the deduction if they have self-employed income, as can employees of an S-corporation who own 2 percent or more of the corporation's stock.

What Policies Are Eligible? 

The entire cost of premiums paid for medical insurance, dental insurance and long-term care insurance are deductible for policies that cover you, your spouse, your dependents or adult children who have not reached age 27 as of the last day of the tax year. If you're self-employed and pay supplemental Medicare premiums, such as for Part B coverage, you can deduct these premiums as well. The policy can be in the name of your business. 

There Are Some Limitations

You can't deduct the costs of health insurance if you or your spouse were eligible to participate in a subsidized group health plan through an employer.

This might be the case if you work a regular job and have your own business on the side, or if your spouse becomes employed and is eligible for coverage under a group plan. For example, if she takes the job in December, you might have paid for 12 months of health insurance coverage for yourself and your family but you can deduct only 11 months' worth of premiums from January through November.

 

Your self-employment income as calculated on Schedule C or F must be equal to or exceed the amount of your deduction. For example, if your business earned $12,000 but premiums cost you $15,000, you can't claim the entire $15,000 but only $12,000. If your business reports a loss, you're not eligible for the deduction at all. You can still claim your health insurance expenses as an itemized medical deduction on Schedule A, but the "above the line" adjustment to income for self-employed people is usually more advantageous. 

Your self-employment taxes are based on the totality of your business income less other expenses — the income you calculate on Schedule C — but not less your insurance premiums. That would be something of a double tax break. 

Claiming the Deduction

Enter your self-employment health insurance deduction on line 29 of Form 1040. There's a worksheet provided in the Instructions for Form 1040 to calculate the deduction, and a more detailed worksheet can be found in Publication 535.

Use Worksheet P found in Publication 974, Premium Tax Credit if you obtained insurance through a health insurance exchange and received a premium assistance tax credit

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