Health Insurance Tax Deduction Information for the Self Employed

09/20/2011
 

If you are a self employed individual, whether filing as a sole proprietorship or an LLC, you can take a deduction for health insurance expenses by your spouse, your dependents or yourself.

Who Can Claim the Self-Employed Health Insurance Deduction

If you report income on Schedule F (farmers) or Schedule C for self employed people you may take the health insurance deduction.  If you have self employed income as a general partner in a partnership or you are an active member of an LLC, you can participate in the health insurance deduction.  Employees of an S Corp who own more than 2% of the corporate stock and also have self employed income can take the health insurance deduction.

Maximum Limit for the Self-Employed Health Insurance Deduction

You must calculate your allowable health insurance deduction before claiming this self employed tax deduction.  Take your self-employment income, and subtract the 50% deduction for self-employment taxes, and subtract any retirement contributions you make to SEP-IRA, SIMPLE-IRA, or Keogh plan. The remainder is your allowable deduction for health insurance expenses.

Health Insurance Deduction in a Loss Year

If you report a loss from your self-employed business activity that renders you ineligible to deduct your health insurance costs since you have no self employed income. If this is the case, you can still claim the self employed health insurance costs on Schedule A which is itemized deductions. If you were eligible for group insurance at any time during the year through your employer or your spouse's employer, you may not deduct the any health insurance costs for those months your were eligible for group health insurance coverage.


Special Rule for 2010 Only
Self-employed persons will be able to deduct their health insurance premiums as a business expense that reduces their self-employment tax and their income tax for the year 2010 only. The deduction will still be taken on Line 29 of the Form 1040, and you'll adjust the net amount of self-employed income subject to the self-employment tax on Schedule SE Line 3.

For 2009, health insurance reduces income tax only; it does not reduce the self-employment tax. For 2011 and later years, the health insurance deduction will revert back to being deducted only against the income tax, unless Congress decides to extend this particular tax break.

If you find yourself newly self employed and requiring individual health insurance or if you are just looking to replace existing self employed health insurance, we would strongly recommend checking out the online offerings of eHealthInsurance.  They are the leader in online health insurance sales since 1997 and offer you the ability to compare benefits of different policies side by side to make your informed buying decision easier. In many cases, it takes about 10 minutes and most policy documents can be signed online using their eSign technology. They have licensed agents available should you have questions.  No insurance agents will call or solicit you directly!