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A guide to available health insurance premium deductions for the self-employed

A guide to available health insurance premium deductions for the self-employed

Posted Mar 12, 2015 by Author

When it comes to filing taxes, anyone who’s ever run a business is likely as familiar with record-keeping rules as an accountant is with a 10-key. 

Hang onto receipts so you can document expenses, ranging from computer repairs to continuing ed. Track your mileage (56 cents per mile for 2014, by the way).  And as for your home office, it can’t be headquarters for your teen’s iTunes downloading. 

But did you also know that you may be able to write off health insurance premiums, if you meet certain requirements, if you contract, consult, freelance or otherwise work in a self-employed capacity?

"The availability of the above-the-line deduction for health insurance is a deduction that all self-employed individuals should be aware of,” said Steve Erchul, CPA, MBT, managing principal of Smith, Schafer & Associates, Ltd., in Edina, Minn.  “As the cost of health insurance continues to increase, this deduction becomes more important as a tax savings measure."

A valuable tax break

If you are self-employed, and ineligible for an employer-sponsored insurance plan through your spouse or domestic partner, you may be eligible to deduct premiums that you pay for medical, dental and insurance coverage for yourself, your spouse or domestic partner and your dependents.

This health insurance write-off is entered on page 1 of Form 1040, which means you benefit whether or not you itemize your deductions. Unlike an itemized deduction, this deduction treatment is beneficial because it lowers your adjusted gross income (AGI). Having a lower AGI can reduce the odds that you’ll be affected by unfavorable phase-out rules that can cut back or eliminate various tax breaks. 

Keep in mind that:

  • This deduction treatment also means you can’t deduct the premiums when you calculate your self-employment tax liability; and,
  • You also cannot write off more in health insurance premiums than you earned, and can take deductions only if they exceed a certain percentage of your income. In other words, the smaller your income is, the easier it is to go over that threshold and claim those deductions. 

Deduction eligibility rules

Eligibility is determined month-by-month

You can claim the health insurance premiums write-off only for months when neither you nor your spouse or domestic partner were eligible to participate in an employer-subsidized health plan. For example, if you were single and ineligible for any employer-provided health plan during the last six months of the year because you left your job and started your own business, you can claim the deduction for premiums you paid for coverage only during that six-month period.

Earned income limitation 

The deduction cannot exceed the earned income you collect from your business. For example, if your self-employment activity is a sole proprietorship that generated a tax loss for the year, you’re not allowed to claim the deduction, because the business doesn’t generate any positive earned income.

Partners and LLC members

Partners and LLC members who are treated as partners for tax purposes are considered to be self-employed. If you fit into this category and directly pay your own health insurance premiums, you can claim the page 1 deduction. If the partnership or LLC pays the premiums, special tax reporting rules apply to the partnership’s or LLC’s return, but you can still claim the deduction for premiums paid for your coverage. In both instances, the deduction is subject to the month-by-month eligibility rule and the earned-income limitation.

Premiums paid to cover your employees

If your business has employees and you pay health insurance premiums for them, these amounts are deducted on the applicable tax form and line for employee benefit program expenses. For example, if your business is a sole proprietorship, you deduct premiums paid to provide health coverage to employees on line 14 of Schedule C.

If you have not yet procured health insurance for 2015, it is not too late. The Obama administration has created a special March 15 through April 30 enrollment period for uninsured Americans who, during tax filing, will learn that they may have to pay the individual shared responsibility payment for not having minimum essential coverage.

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