Health Insurance Premium Deduction for the Self-employed, S corps, and LLCs

Larry Villano, Publisher of Loopholelewy.com

If you're a sole proprietor (a Schedule C or F filer) or owner of a single-member LLC (which by default is treated as a sole proprietorship) and in 2013 you established a health insurance plan in either your own name or the business's name to cover you, your spouse, and your dependents, you may claim 100% of the premiums paid directly on Form 1040, line 29. You don't have to itemize to get the deduction.

If you're not eligible to deduct health insurance premiums directly on Form 1040, line 29, you may deduct them on Schedule A as an itemized deduction. The problem with this is, for 2013 your total medical expenses must exceed 10% of your adjusted gross income if you're under 65 years old ( or 7 1/2% of AGI if your 65 or older) to get a tax benefit.

If you were a more-than-2% shareholder/employee of an S corporation, a partner in a partnership, or a member of a multi-member LLC, you may also claim the deduction directly on Form 1040, line 29, provided the plan is considered to have been established by the business entity and not by you personally.

Whether you or the business are considered to have established the plan depends on two things:

  1. Who actually pays the premiums
  2. How the premiums are reported by both you and the business for income tax purposes.

In other words, it's not whose name the policy is in that determines who established the plan. It may be in your name or the business's name. Instead, it's who actually pays the premiums and how the premiums are reported for tax purposes that determines who established the plan.

One of three scenarios must be satisfied for a more-than-2% S corporation shareholder/employee, partner in a partnership, or member of a multi-member LLC, to be eligible to deduct 100% of health insurance premiums directly on Form 1040, line 29.