Are you starting your own business soon? Are all the unexpected employer expenses adding up? Let me advise you about the benefits available to self-employed individuals regarding their health insurance costs. Self-employed taxpayers can deduct 100% of their health insurance costs in computing their income taxes. These 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 are deductible as itemized medical costs, but only to the extent your total medical expenses exceed 10% of your adjusted gross income (AGI). A more favorable 7.5%-of-AGI threshold applies if you or your spouse has reached age 65 by the end of the tax year.
If total medical expenses don't exceed 10%/7.5% of AGI, no itemized deduction is available. However, self-employed taxpayers can nevertheless deduct—as an “above the line” deduction, reducing AGI—100% of the health insurance costs for him or herself, his or her spouse, dependents, and for any child of the self-employed who is under age 27 as of the end of the tax year.
For example, Max, who is self-employed, pays $3,000 in health insurance premiums and has no other medical expenses. His AGI is $50,000. Since 10% of $50,000 equals $5,000, Max can't claim an itemized medical expense deduction for the health insurance premiums. However, since Max is self-employed, he can deduct the entire $3,000 above the line.
These rules only apply 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 effectively can reduce your cost of health insurance. So if you are starting your business soon, or just making changes in your existing business regarding health insurance, call your accountant at CMP who can answer your questions and plan for your upcoming year’s tax returns.