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Self-Employed Health Insurance Deduction

If you were self-employed during 2012 you can deduct 100% of the premiums paid for medical and dental insurance, and qualified long-term care insurance for yourself, your spouse, and your dependents.

Where to Deduct Health Insurance Premiums

Self-employed persons claim the health insurance deduction directly on Line 29 of Form 1040, not Schedule C.

It's an above-the-line deduction, which means, even if you don't itemize your deductions you still get to claim this deduction.

Deductible Health Insurance Premiums

Health insurance premiums include premiums paid for:

Who Can Claim the Health Insurance Deduction?

The following may claim the health insurance deduction:

Note that LLC members are treated as follows:

Seven Points to Keep in Mind About Deducting Health Insurance Premiums

  1. The 100% health insurance deduction is an above-the-line deduction.
    • An above-the-line deduction is a deduction you may claim even if you don't itemize your deductions.
    • Above-the-line deductions are included in the calculation of adjusted gross income.
    • If you don't qualify to claim the 100% health insurance deduction as an above-the-line deduction, you may claim the health insurance premiums you paid on Schedule A as an itemized deduction.
  2. Self-employed:
    • If you are self-employed (sole proprietor or general partner), you deduct health insurance premiums on Line 29 of Form 1040.
  3. Purchasing a policy:
    • Sole proprietorship:
      • If you're a sole proprietor, you may purchase a policy in your own name or the name of the business.
    • S corporation:
      • S corporation shareholders deduct the health insurance premiums on Form 1040, line 29.
      • If you're a more-than-2% shareholder of an S corporation, the plan must be "established" by the S corporation for you to qualify for the deduction.
        • Note: If you don't qualify for an above-the-line deduction for premiums you paid out of your pocket, you can claim the premiums you paid on Schedule A as an itemized deduction).
      • To qualify for the above-the-line deduction (Form 1040, line 29), the plan must be "established" by the S corporation.
      • The plan is considered established by the S corporation even if the plan is in your own name PROVIDED:
        • The corporation pays the premiums to the insurance company OR reimburses you for the premiums you paid to the insurance company AND
        • The premiums are reported as wages on your Form W-2 and included on your individual income tax return.
    • How an S corporation handles health insurance premiums and the deduction rules for shareholder-employees.
  4. Claiming the deduction:
    • The health insurance deduction may not exceed the net profit from the business under which the health insurance premiums are paid, less deductions claimed for 50% of self-employment tax and Keogh, SEP, or SIMPLE retirement plan contributions.
  5. More than one business:
    • If you have more than one unincorporated business, you cannot add up the profits from each business and use that total to determine your net income ceiling.
    • Only the net income for the business for which the plan is established is considered.
  6. More-than-2% S corporation shareholder:
    • If you are a more-then 2% S corporation shareholder and the S corporation has a health insurance plan, your health insurance deduction cannot be more than your wages from the S corporation.
  7. If eligible to participate in an employer plan:
    • If in 2011 you were eligible to participate in any employer-subsidized plan (including your spouse's) during any month, you may not claim the deduction for any of those months.
  8. Self-employment tax:
    • When computing self-employment tax, do NOT reduce net earnings from self-employment by your health insurance deduction.

The Self-Employed Advantage

An individual who is not self-employed (or not a more-than-2%  shareholder of an S corporation) does not get to deduct health insurance premiums as an above-the-line deduction on Form 1040, Line 29.

Instead, he/she must deduct health insurance premiums along with other medical expenses as an itemized deduction on Schedule A. To get a tax benefit, medical expenses on Schedule A must exceed 7.5% of adjusted gross income.

However, as a self-employed person, you get to deduct the entire health insurance premiums even if you don't itemize your deductions. You simply claim the deduction Line 29 of Form 1040.

Other Medical Expenses:

If you're eligible to claim an above-the -line deduction for health insurance premiums and have other medical expenses, such as co-payments for office visits to doctors, prescriptions, etc. of course you may claim them on Schedule A if you itemize your deductions.

Tip: Although medical expenses must exceed 7.5% of adjusted gross income for federal tax purposes, this may not apply for state tax purposes. For example, in Arizona, you can deduct 100% of medical expenses. Check with your state.

Where to Claim the Health Insurance Deduction

Claim the deduction on Line 29, Form 1040.

Sole proprietors:

Claim 100% as an above-the-line deduction.

The policy may be purchased in your own name or the name of the business.

Sole shareholder-employee in an S corporation:

According to the IRS, the above-the-line deduction is allowed only if the policy was purchased in the corporation's name.

Qualified Long-Term Care Insurance Policy for Self-Employed Persons

Part of the premium of a qualified long-term care insurance policy is deductible depending on your age at the END OF THE YEAR.

If you are self-employed, the part that is deductible is included as an above-the-line deduction on Line 29, Form 1040 along with your other medical insurance premiums.

For 2011, the maximum deductible premium for each person covered under a qualified long-term care policy is:

Make sure, if you are thinking about purchasing a long-term care insurance policy that it qualifies for the tax treatment explained here.

For example, the contract must:

Generally, you can exclude benefits (other than dividends) received under a qualified long-term care insurance contract from income.

However, if you receive per diem payments (payments made without regard to actual expenses), you are limited to the amount you can exclude from income.

Form 1099-LTC is issued to recipients of payments under a long-term care insurance contract.

Box 3, of Form 1099-LTC, should indicate whether the payments were on a per diem basis or reimbursements of actual long-term care expenses.

You use Form 8853 to report per diem payments and reimbursements and to determine if any of the per diem payments are taxable.