The self-employed health insurance deduction is a tax deduction for individuals who are self-employed and pay for their health insurance. This deduction can be taken on both state and federal taxes, and it is available to sole proprietors, partners in partnerships, LLC members, and S corporation shareholders. The amount of the deduction is based on the premiums paid for health insurance, and it is available for both medical and dental insurance. The deduction can also be taken for long-term care insurance premiums.
Self-employed health insurance deduction
If you're self-employed, you may be able to deduct the cost of your health insurance premiums on your federal income tax return. The self-employed health insurance deduction is available to sole proprietors, partners in partnerships, and S corporation shareholders who own more than 2% of the company.
To qualify for the deduction, you must have paid for health insurance for yourself, your spouse, and your dependents. You can't deduct the cost of long-term care insurance or Medicare premiums.
The amount you can deduct is based on your net self-employment income. For example, if your net self-employment income is $50,000 and you paid $5,000 in health insurance premiums, you can deduct 10% of the premium costs ($500).
If you're eligible for the self-employed health insurance deduction, you claim it on Schedule C (Form 1040) or Schedule C-EZ (Form 1040).
How do you qualify for the deduction?
To qualify for the deduction, you must be self-employed and have paid health insurance premiums for yourself and your family. The deduction is available whether you purchase health insurance through the Marketplace or directly from an insurance company. If you are eligible for the deduction, you can claim it on your federal income tax return.
What are the eligible expenses?
Some eligible expenses can be deducted when filing taxes as a self-employed individual. These include:
• Health insurance premiums: This is the most common deduction and can be taken for both medical and dental insurance plans.
• Long-term care insurance premiums: This deduction can be taken for policies that cover both nursing home care and in-home care.
• Retirement plan contributions: Self-employed individuals can deduct contributions made to SEP IRA, SIMPLE IRA, or Keogh plans.
• Home office expenses: If you use a portion of your home exclusively for business purposes, you may be able to deduct a portion of your mortgage interest, property taxes, and utilities.
• Business travel expenses: You can deduct the cost of airfare, hotels, rental cars, and meals while on business trips.
Self-employed persons Deduction limits of health insurance
There is no dollar limit on the deduction, but it is limited to your net self-employment income. In other words, if your business isn't making a profit, you can't deduct.
For example, let's say you paid $12,000 for health insurance for the year and your net profit on your property was $20,000. You can deduct 100% of your premium. On the other hand, if you paid $12,000 for health insurance but only received $5,000 from your business, you would only be able to deduct $5,000 in premiums.
The remaining deduction doesn't have to be lost—any premiums you can't deduct as self-employed health insurance can be claimed as out-of-pocket medical expenses on Schedule A, Itemized Deductions. However, you'll need to itemize deductions to get the benefit, and you can only deduct out-of-pocket medical expenses that exceed 7.5% of your adjusted gross income (AGI).
While there is no limit on the amount of health, dental, and vision insurance premiums you can deduct, the IRS limits deductions for long-term care premiums. This cap is based on the person's age at the end of the tax year.
How to claim a discount on self-employed health insurance
The self-employed health insurance deduction is an income adjustment, also known as an "over-the-line deduction" because it is not necessary to itemize it to claim it.
Instead, you claim the deduction in Part II of Schedule 1, Other Income and Income Adjustments. The IRS instructions for Form 1040 include a worksheet to help you calculate the deduction.
Claiming the self-employed health insurance deduction can be complicated — especially if you're also eligible for a premium tax credit because you bought coverage through the Health Insurance Marketplace. If you need help, be sure to consult a qualified tax professional.