BENEFITS

Self Employed Health Insurance Deduction

Being an entrepreneur has it's benefits, but it also comes with some additional responsibilities, one of which is finding your own health insurance coverage and paying the premiums. Fortunately, the health insurance premiums you pay for yourself and your family may deductible if you are a Schedule C filer and your business had a net profit for the year, you are a partner with net earnings from self employment, you calculated your net earnings using an optional method on Schedule SE, or you own 2% or more of the shares in an S corp you received wages from. If you meet any of the aforementioned descriptions, premiums paid for you and your family generally are deductible on line 29 of Form 1040, NOT on your Schedule C.

REAL ESTATE AGENT

Megan is a 28-year-old Burlington, Vermont based independent real estate agent. Last year, Megan earned $98,000 of commission income and had net profit from her business of $80,000. Megan paid $2,400 for health insurance during the year. Since her net profit exceeds the amount she spent on health care coverage, Megan would deduct the $2,400 she spent on health insurance last year while filing taxes on line 29 of her Form 1040.

PROFESSIONAL SERVICES

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.

COURIER

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.

AIRBNB HOST / LANDLORD

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.

TASKER

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.

WHAT YOU SHOULD KNOW

  • You're self employed health insurance deduction will typically be equal to the lesser of the total amount you paid for health care coverage established under your business (if Schedule C filer policy can be in your name) during the year OR the net profit from your business and any other earned income (net earnings from sale, transfer or licensing of property you created). Refer to Form 1040 instructions for a health insurance deduction worksheet. If you are deducting medicare or long-term care premiums refer to the self employed health insurance deduction worksheet included in Publication 535. If your plan was obtained from the Health Insurance Marketplace, refer to the self employed health insurance deduction worksheet included in Publication 974.
  • Health insurance premiums paid to cover you, your spouse, and your children and dependents under 27 years old as of the end of the year could be deductible. Note however that you cannot deduct health coverage for any month you were eligible to participate in a health insurance plan offered by an employer of any of the aforementioned people.
  • You must use the self-employed health insurance deduction if you want to deduct your health care coverage. Health care premiums paid for the benefit of you and your family should not be deducted on your Schedule C. Further, only health care coverage costs you incurred exceeding the self-employed health insurance deduction limit can be included on your Schedule A (if you itemize).
  • Typically you can include any premiums paid for long-term care insurance and medicare (a-d) as part of your self-employed health insurance deduction.
  • If you do not have health care coverage, in 2018 you will be subject to a penalty equal to the higher of $695 per adult OR 2.5% of your yearly household income, whichever is greater. In tax years 2019 and beyond, the uninsured penalty is removed under the Tax Cuts and Jobs Act.

No items found.