For one year after starting my own business, I paid my own health insurance premiums.
The expense was necessary, but close to a budget buster. Heck, the policy I was able to get cost more than the exorbitant COBRA coverage it replaced.
But there was one good thing about being self-employed and paying for my own medical coverage. I got to deduct the premiums in full on my tax return.
Actually, it was an adjustment to income, one of more than a dozen found on the last section of Form 1040's first page. These subtractions from gross income are commonly referred to as above-the-line deductions.
This deduction (or adjustment to income if you're a stickler for titles) is today's Daily Tax Tip.
What you can deduct: It's not just medical coverage costs that count here. Self-employed taxpayers also can deduct dental policy payments, as well as long-term care insurance premiums on line 29 of Form 1040.
The deduction also applies to insurance premiums paid by the self-employed worker for a spouse and dependents.
And, according to the Form 1040 directions, the deductible insurance also can cover a child who was 26 or younger at the end of 2011 even if he or she was not the worker's dependent.
Who qualifies: In order to claim this deduction, the IRS says you must be one of the following:
- A self-employed individual with a net profit reported on Form 1040 Schedule C, Profit or Loss From Business; Schedule C-EZ, Net Profit From Business; or Schedule F, Profit or Loss From Farming.
- A partner with net earnings from self-employment reported on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., box 14, code A.
- A shareholder owning more than 2 percent of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2, Wage and Tax Statement.
Policy requirements: The insurance plan must be established under your business.
For self-employed individuals filing a Schedule C, C-EZ or F, the policy can be either in the name of the business or in the name of the individual.
Partners can establish the medical policy either in the name of the partnership or in the name of the partner. You can either pay the premiums yourself or your partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income.
And for more-than-2-percent shareholders, the IRS says the policy can be either in the name of the S corporation or in the name of the shareholder. As with partnerships, S corp members can pay the premiums themselves or the corporation can pay them.
If the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 as wages to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.
A few other points: You'll have to fill out a short worksheet, found in the 1040 instructions (or your tax software) to make sure exactly how much you can deduct.
And even the availability of other coverage could limit your self-employed health care deduction.
If you were eligible to participate in any employer-subsidized health plan, including your spouse's workplace plan, you cannot take the self-employed health coverage deduction for any month that such coverage was available. This restriction applies even if you didn't actually participate in the plan.
You can get more details in IRS Publication 535.
Yeah, it was those sorts of administrative considerations, as well as the high costs, that made me glad to be shed of paying my own health insurance.
But the tax break did help.
So if you're self-employed and shelling out for your own medical coverage, be sure to take the deduction.
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