Self-employed individual's deduction for health insurance costs

There are tax benefits available to self-employed individuals who pay health insurance costs. Self-employed taxpayers can deduct 100% of their health insurance costs in computing their income taxes. This tax savings can reduce your after-tax cost of health coverage.

A brief review of the tax rules on health insurance premiums may be useful. Health insurance premiums paid by non-self-employed taxpayers are deductible as itemized medical expense deductions, but, for 2019 and later, only to the extent your total medical expenses exceed 10% of your adjusted gross income (AGI).

Because of the "floor" that applies to the medical expense deduction, if total medical expenses don't exceed 10% of AGI, no itemized deduction is available.

However, a self-employed taxpayer can deduct - as an "above the line" deduction, reducing AGI - 100% of the health insurance costs for the taxpayer, spouse, and dependents, and for any child of the self-employed taxpayer who is under age 27 as of the end of the tax year.

Example. M, who is self-employed, pays $3,000 in health insurance premiums and has no other medical expenses. M's AGI is $50,000. For 2019, since 10% of $50,000 equals $5,000, M could not claim an itemized medical expense deduction for the health insurance premiums. But, since M is self-employed, M can deduct the entire $3,000 above the line.

The health insurance deduction for self-employed taxpayers only applies for any calendar month in which you aren't otherwise eligible to participate in any subsidized health plan maintained by any employer of yours or of your spouse, or any plan maintained by any employer of your dependent or your under-age-27 child.

Also, the deduction can't exceed your earned income from the trade or business for which the health insurance plan was established.

These rules also apply to partners in partnerships and more-than-2% shareholders of S corporations where the partnership or corporation pays for health insurance coverage for its partners or shareholders.

The tax benefits of a self-employed individual's health insurance costs can effectively reduce your cost of health insurance. You may wish to consider stepping up your coverage in light of these savings. Please contact us if you wish to discuss how these rules apply to your particular situation or if you have any questions.