Over the past number of months there has been, appropriately so, an extreme amount of debate over the proposals for overhauling the health care system, and how and by whom it’s paid for. Lost in that debate, however, is the fact that, at least in Massachusetts, everyone is now required to have health care insurance. For many, especially self-employed individuals, that has created financial difficulties of its own. How that will be addressed if and when any new Federally backed health care/health insurance system is passed, only time will tell. (From this vantage point, it appears now that, thankfully so, major overhauls of the type the O’Bama Administration has been pushing are very unlikely to become law. However, only time will tell.)
In the meantime, for those self-employed individuals who must purchase their own health care, there is a (albeit small) tax-related silver lining. Here’s how it works.
For anybody who itemizes deductions on their Schedule A, you may deduct the cost of your (and your spouse’s and dependent’s) medical care, including the cost of your health insurance, subject to certain (often very large) restrictions. However, if you are self-employed, there is a special deduction you may be able to take on your health insurance premiums.
Of course, before doing so, you have to figure out whether you’re eligible for this special deduction. You are if:
· You are self-employed and you made a net profit during the tax year, or,· You’re a general partner in, or limited partner receiving guaranteed payments from, an S corporation, or,· You’re a person who receives wages from, holds a share greater than 2% in, and is treated as a partner of, an S corporation.
Assuming you find that you qualify for this deduction, how does it work? For those eligible, you can take 100% of your spouse’s as well as your dependent’s health insurance costs as a deduction on your Form 1040, making this deduction an especially attractive one. Why?
Since you can deduct your self-employment health insurance costs on your Form 1040 rather than on your Schedule A:
· You’re able to deduct the costs even if you don’t itemize your deductions and file Schedule A, or,
· If you do itemize on Schedule A, you’re able to increase the amount you’ll be able to deduct, since you avoid Schedule A’s 7.5% limit.
As usual, there are a couple of limitations. For one, your self-employment health insurance deduction cannot be greater than that year’s net earnings from your self-employment trade or business. Additionally, if you qualify for this deduction but you or your spouse – in addition to being self-employed – also work for and earn income from an employer and were eligible for a subsidized health plan maintained by your or your spouse’s employer for any month (or part of a month) during the tax year, than any of the monies you paid for your self-employment health insurance during those months cannot be included in this deduction. (For additional information, see IRS Publication 535).
In conclusion, this word of advice. The rules governing this section of the tax code – like most sections of the tax code, can be very confusing. So, you’re trying to calculate if, and if so, how much of the self-employment health insurance deduction you’re eligible for, before filing you tax returns, you should always speak and check with, and take the advise of your CPA or tax attorney.
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