This special personal deduction allows self-employed people who qualify to deduct 100% of their health insurance premiums for themselves, their spouses, and their dependents.
By Stephen Fishman, J.D. · USC Gould School of Law
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If you're one of the millions of self-employed people who have to pay for your own health insurance for yourself and your family, you might be entitled to a special tax deduction. If you are, be absolutely sure you take it because it can be one of the largest deductions you have.
Self-employed people who qualify are allowed to deduct 100% of their health insurance premiums (including dental and long-term care coverage) for themselves, their spouses, their dependents, and any nondependent children aged 26 or younger at the end of the year. It's important to understand, however, that this isn't a business deduction. It's a special personal deduction for the self-employed. The deduction applies only to your federal, state, and local income taxes, not to your self-employment taxes.
To qualify for the deduction, you must meet two requirements:
- You have no other health insurance coverage. You may not take the self-employed health insurance deduction if you're eligible to participate in a health insurance plan maintained by your employer or your spouse's employer.
- You have business income. You may deduct only as much as the net income you earn from your business. If your business earns no money or incurs a loss, you get no deduction. If you have more than one business, you can't combine the income from all your businesses for purposes of the income limit. You may only use the income from a single business you designate to be the health insurance plan sponsor.
Designating Your Plan Sponsor
If you qualify, you get the health insurance deduction whether you purchase your health insurance policy as an individual or have your business obtain it. If you purchase your health insurance plan in the name of one of your businesses, that business will be the sponsor. However, the IRS says you may purchase your health coverage in your own name and still get the self-employed health insurance deduction. (IRS Chief Counsel Memo 200524001.) This tactic might be advantageous because it allows you to pick which of your businesses will be the sponsor at the start of each year. Obviously, you should pick the business you think will earn the most money that year.
Moreover, if you have more than one business, you can have one purchase medical insurance and the other purchase dental insurance and deduct 100% of the premiums for each policy, subject to the income limits discussed above. This approach will be helpful if no single business earns enough income for you to deduct both policies through one business.
Tax Reporting
Because the self-employed health insurance deduction is a personal deduction, it doesn't go on your Schedule C if you're a sole proprietor. You deduct it in the "Adjustments to Income" section on Schedule 1 of Form 1040. If you itemize your deductions and don't claim 100% of your self-employed health insurance costs on Schedule 1, you may include the rest with all other medical expenses on Schedule A, subject to the 7.5% of Adjusted Gross Income limit. You would have to do this, for example, if your health insurance premiums exceed your business income.
To learn more about what you can deduct, see Nolo's Personal Tax Deductions and Tax Breaks section.
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