Whenever tax season rolls around, it tends to send a collective shudder across the masses. If you are self employed, navigating the sea of associated tax requirements and potential deductions can feel beyond overwhelming. One deduction that brings the most headaches with it for self employed individuals regards health insurance.
If you are self employed, you are responsible for purchasing and maintaining your own health insurance. Being self insured can come at a significantly higher cost, so deducting these fees on your tax return is a welcome incentive. If you are learning about the self employed health insurance deduction for the first time, or are lost in a sea of IRS paperwork trying to come up for air, this comprehensive analysis will equip you with the tools you need to traverse the complex tax maze.
What Is A Self Employed Health Insurance Deduction?
The self employed health insurance deduction serves the exact purpose which its name indicates, namely, to offer you a tax break on the costs you incur in having to purchase your own health insurance with no outside help. As the fees and premiums associated with being self insured are typically much higher than one would experience if receiving health insurance directly through an employer, this deduction is a great opportunity to get some of that money back by reducing your taxable income.
If you are self insured under a comprehensive medical plan, dental plan, or similar ongoing coverage, you might be able to make use of the self employed health insurance deduction. The reduction in your taxable income experienced because of this deduction can offer your more latitude to cover your insurance premiums and costs for yourself and any relevant dependents.
Typically, you can deduct the costs of self employed health insurance as long as they are more than 7.5 percent of your adjustable gross income for that year. It is anticipated that this allotment will increase to 10% in upcoming years, so be sure to pay attention to any regulatory updates that may affect you in this area. The self employed health insurance tax break allows you to deduct the entirety of your coverage premiums. Therefore, this deduction allows you to lessen the amount of your taxable adjusted gross income by the total of your premiums paid that year.
Who Qualifies For A Deduction?
Plan Eligibility Matters
Being self employed and having earned a legitimate profit through your business endeavors is the first step in being able to claim the self employed health insurance deduction. The next is determining whether you are enrolled in an eligible plan. For example, if you purchased an insurance plan from a company, broker, or state exchange, and you pay your own premiums in their entirety, you may qualify for this deduction.
Furthermore, if your aggregate medical costs for the year including deductibles, copays, and coinsurance comprise over 7.5 percent of your yearly income, or 10 percent in upcoming tax years, you will also likely qualify for the deduction. If you itemize your self employed health insurance deduction, you may also be able to adjust your gross income to include costs for things like medical visits or prescription drugs.
However, it is important to know that some coverage options do not qualify for the self employed health insurance deduction. As a result, you may be self employed and possess health insurance but not be eligible for this tax break. For example, if you chose an individual or family policy though the Affordable Care Act marketplace and received an associated advanced premium tax credit, you might not receive this deduction. It is possible you could deduct part of the out-of-pocket premiums, however.
Another instance where the deduction may not apply is if you purchased a plan with pre-tax funds. This is because you would already have received a tax break by using pre-tax money to purchase the policy in the first place.
One final example where your insurance plan matters to qualify for the deduction has to do with Christian Healthcare plans. These types of policies work as a marketplace of contributed funds instead of individual premiums, which means that the money floats between members. These plans are usually considerably cheaper than standard insurance offerings, but it is something to know of if you are part of one and were hoping to enjoy the self employed health insurance deduction.
You Must Show A Profit
Another key factor in being able to receive the self employed health insurance deduction is your ability to show that your business made a profit during the relevant tax year. If you sustained a loss that must be reported on Schedule C on your tax form, you cannot make use of the deduction. To receive the deduction, you must report a sustainable profit.
If, when conducting your tax reporting on Schedule C, you have a partial profit that does not equal the premiums, but is still a profit nonetheless, you can gain a small deduction benefit. As long as your net income on Schedule C is $0, you can deduct your premiums to that point.
You Must Not Be Eligible For Any Other Plans
To qualify for the self employed health insurance deduction, you must not be eligible for coverage on another group plan, such as through your spouse’s employer. Whether you participate in that plan makes no difference. In this case, your only option would be to itemize your proposed deductions on Schedule A.
The somewhat complicated part regarding this eligibility rule is the fact that it can vary between months. So, in any given month where you or your spouse remain eligible for group coverage on another plan, you cannot claim the self employed health insurance deduction. However, you may claim the deduction on your tax return for a month or months in which neither you nor your spouse were eligible to receive group coverage.
As such, it is a good idea to keep careful records of your health insurance history and any months in which you or your spouse may have been eligible for a group plan if you wish to claim a partial deduction.
Members Of Partnerships And LLC’s
Another option if you would like to claim the self employed health insurance deduction may apply if you are a member of a partnership or LLC. If you fit into either of these categories, are considered a tax partner, and are responsible for the entirety of your health insurance premiums, you can make use of this deduction.
Alternatively, if the LLC or partnership handles the premiums, different tax legislation applies, but you may still claim at least a partial deduction for the premiums specific to your individual coverage. Our previous discussion regarding group plan eligibility and showing an annual business profit applies in these scenarios. This means that you must simultaneously be able to show a profit rather than a loss and have certain months in which you were not eligible for coverage on another plan in order to enjoy this deduction.
Options As An Employer
Finally, you may claim the self employed health insurance tax deduction if you employ individuals to help you run your business, and you pay out premiums on their behalf. You can deduct these amounts on the tax form line relevant to your business structure in the category employee benefit program expenses.
How To Claim A Deduction
The self employed health insurance tax deduction may be claimed on the tax Form 1040, page 1, which allows you to receive the tax break without itemizing. If you choose to itemize your deductions and are not claiming the entirety of your health insurance premiums on Form 1040, you can lump in the remainder with any other medical costs on Schedule A. Schedule A is where the 7.5 percent adjusted gross income amount comes into play.
Claiming the self employed health insurance deduction is a multi-faceted and sometimes complicated process. Our overview will definitely get you on track to determining whether you can make use of this deduction, but you should also take a look on IRS.gov to make sure you are closely following any regulations specific to your situation and business. There is a worksheet guide available in the IRS’s Form 1040 instructions which will give you additional information regarding calculating your particular set of deductions.
Navigating the world of taxes as a self employed professional differs greatly from what you might otherwise experience when working for a company. In determining whether you are eligible for the self employed health insurance deduction or when trying to identify the best approach to completing Form 1040, it might be wise to seek the advice of a tax professional in advance of filing.
This is beneficial whether you have questions about the process, want to make sure you are up to speed on the latest regulations, or simply want to confirm that you do not miss any itemizations. There are many rewards to enjoy as a self employed individual, including unique deduction options, so it is important to make sure you capitalize on these advantages in the next tax season.