Self Employed Health Insurance Deduction

Kelsey is a sole proprietor management consultant who recently started her own advisory practice. Since it was her first year in business, she barely broke even, earning $5,500 of net profit from her business. During the year she spent $7,300 on health insurance coverage for herself, her husband and their 3 year old daughter. Since her premiums exceeded her business net profit, her self employed health insurance deduction will be limited to $5,500, and be deductible on her Form 1040.

Don is a stay at home dad and part time Postmates driver. His wife, Issa, works at a local bank that offers health insurance coverage for her entire family. Don thought he could get a better deal purchasing his own policy instead of enrolling in his wife's subsidized plan. Unfortunately for Don, when he prepares his tax return he will not be allowed to take the self-employed health insurance deduction for his coverage since he was eligible to participate in the health plan offered by his wife's employer.

In July, Will quit his job and purchased a private insurance plan. Rather than get a new job, Will decided to relax and live off of the Airbnb income generated from renting the second room in his home. Will did not provide any significant services to his guests. When Will asked his CPA if he could deduct his health insurance costs as part of his rental activities, his accountant informed him that because he did not provide any significant services to his guests, the IRS would not consider himself-employed and he would not be eligible to take the self employed health insurance deduction.

Derek is a single 24-year-old full-time tasker who specializes in home repair. Derek figured that since he had been feeling pretty good lately, there was no reason for him to purchase health care coverage. Last year, Derek's self employment income was $47,000 (equal to his household income). Assume an average annual bronze plan costs $2,500. Since he did not have health insurance during the year, when he prepared his tax return he will be subject to a $737 penalty (($47,000 household income - $10,150 individual filing threshold) * 2%). Note that if this penalty exceeded the cost of an average annual bronze plan, it would be limited to the cost of the bronze plan. Had Derek purchased health insurance through his business, instead of paying an additional $737 of taxes, he could have reduced his taxable income by thousands of dollars and had coverage.