The Self-Employed Health Insurance Deduction | Nolo
If you’re one of the millions of self-employed people who have to pay for your own health insurance for you and your family, you may be entitled to a special tax deduction. if so, make absolutely sure you take it because it can be one of the largest deductions you have.
Qualifying self-employed individuals can deduct 100% of their health insurance premiums (including dental and long-term care coverage) for themselves, their spouses, their dependents, and any non-dependent children of Age 26 or younger at the end of the year. however, it is important to understand that this is not a business deduction. It is a special personal deduction for the self-employed. the deduction applies only to your federal, state, and local income taxes, not your self-employment taxes.
To qualify for the deduction, you must meet two requirements:
- you do not have other health insurance coverage. you cannot take the self-employment health insurance deduction if you are eligible to participate in a health insurance plan maintained by your employer or your employer of the spouse.
- have business income. You can only deduct as much as the net income you earn from your business. If your business doesn’t make money or incurs a loss, you don’t get a deduction. If you have more than one business, you cannot combine the income from all of your businesses for income limit purposes. You can only use income from a single business that you designate as the health plan sponsor.
designation of your plan sponsor
If you qualify, you get the health insurance deduction whether you buy your health insurance policy as an individual or your company gets it. If you purchase your health insurance plan on behalf of one of your businesses, that business will be the sponsor. however, the irs says you can buy your health coverage in your own name and still take the self-employment health insurance deduction. (IRS Lead Counsel Memo 200524001). This tactic can be advantageous because it allows you to choose which of your businesses will be the sponsor at the beginning of each year. obviously, you should choose the business that you think will make the most money that year.
Also, if you have more than one business, you can have one buy health insurance and the other buy dental insurance and deduct 100% of the premiums for each policy, subject to the income limits above. this approach will be useful if no single business generates enough income for you to deduct both policies through one business.
Because the self-employed health insurance deduction is a personal deduction, it is not included in your Schedule C if you are a sole proprietor. You deduct it in the “adjustments to income” section on Schedule 1 of Form 1040. If you itemize your deductions and you don’t claim 100% of your self-employment health insurance costs on Schedule 1, you can include the rest with all other medical expenses on schedule a, subject to the limit of 7.5% of adjusted gross income. you would have to do this, for example, if your health insurance premiums exceed your business income.
For more information on what you can deduct, see the personal tax deductions and tax exemptions section of nolo.