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What You Need to Know About Self-Employed Health Insurance Deductions

By MarksNelson on November 13, 2017 in Articles, Beth Van Leeuwen CPA, Tax

As open enrollment approaches for many companies, it’s a good time to refresh yourself on the rules for the deduction for self-employed health insurance.

A brief overview of the tax rules on health insurance premiums:

Health insurance premiums are deductible as itemized medical costs, but only to the extent total medical expenses exceed 10% of a taxpayer’s adjusted gross income.  However, self-employed taxpayers can deduct 100% of their health insurance costs in computing their income taxes.  This tax savings can reduce the after-tax cost of health coverage.

Who is considered “self-employed”?

For purposes of the self-employed health insurance deduction, “self-employed” individuals include not only sole proprietors but also partners in a partnership and greater than 2% shareholders in an S corporation.  The deduction is allowed for premiums paid for medical insurance for the self-employed person (i.e. the taxpayer), the taxpayer’s spouse, the taxpayer’s dependents, and any child of the taxpayer who hasn’t reached age 27 as of the end of the year.

Are there any restrictions on the self-employed health insurance deduction?

Yes.  A taxpayer is not eligible for a self-employed health insurance deduction for any calendar month for which the taxpayer is eligible to participate in a subsidized plan maintained by any employer of the taxpayer, the spouse of the taxpayer, any dependent of the taxpayer, or any under-age-27 child.

Also, the taxpayer may only deduct self-employed health insurance costs to the extent they do not exceed the taxpayer’s net earnings from his self-employed trade or business providing the coverage.

Do not forget that for the premiums to be deductible for a greater than 2% shareholder in an S corporation, the premiums must be included in the wages of the shareholder.  Furthermore, the premiums need to be included as premiums paid to an S corporation shareholder in Box 14 of the Form W-2.

To further discuss the self-employed health insurance deduction or other ideas for minimizing your income tax liability, contact your MarksNelson tax professional at 816-743-7700.