Tax benefits are available to self-employed individuals who pay health insurance costs.
Self-employed taxpayers can deduct 100% of their health insurance costs in computing their income taxes.
This tax savings can reduce after-tax cost of health coverage.
Tax Rules on Health Insurance Premiums
Health insurance premiums paid by non-self-employed taxpayers are deductible as itemized medical expense deductions, but, only to the extent your total medical expenses exceed 7.5% of your adjusted gross income (AGI).
With the “floor” that applies to the medical expense deduction, if total medical expenses don’t exceed the percentage-of-AGI limitation, no itemized deduction is available.
However, a self-employed taxpayer can deduct healthcare costs as an “above the line” deduction, reducing AGI by 100% of the health insurance costs for the taxpayer, spouse, and dependents, and for any child of the self-employed taxpayer who is under age 27 as of the end of the tax year.
Example. Molly, who is self-employed, pays $4,500 in health insurance premiums and has no other medical expenses. Molly’s AGI is $80,000.
Since 7.5% of $80,000 equals $6,000, Molly couldn’t claim an itemized medical expense deduction for the health insurance premiums. But, since Molly is self-employed, she can deduct the entire $4,500 above the line.
Self-Employed Health Deduction Limitations
The health insurance deduction for self-employed people only applies for any calendar month in which you aren’t otherwise eligible to participate in any subsidized health plan maintained by any employer of yours or of your spouse, or any plan maintained by any employer of your dependent or your under-age-27 child.
The self-employed health insurance deduction can’t exceed your earned income from the trade or business for which the health insurance plan was established.
Self-Employed Health Deduction for Partners and Shareholders
These self-employed health rules also apply to partners in partnerships and more-than-2% shareholders of S corporations where the partnership or corporation pays for health insurance coverage for its partners or shareholders.
The tax benefits of a self-employed individual’s health insurance costs can effectively reduce your cost of health insurance. In light of these savings, many self-employed people consider stepping up their health insurance coverage.
If you have questions, reach out to us at 314-961-1600 or contact us to discuss your situation.
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Debra Annis brings 40+ years of experience in accounting and tax. She helps clients overcome obstacles with cash flow, planning, stability and growth. She enjoys working with clients to find solutions that achieve their plans and avoid paying unnecessary tax.
About Smith Patrick CPAs
Smith Patrick CPAs is a boutique, St. Louis-based, CPA firm dedicated to providing personal guidance on taxes, investment advice and financial service to forward-thinking businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to business owners and high-net worth families across the country. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.