Self-Employed Health Insurance Deduction

By | January 28, 2015

What tax benefits are available to self-employed individuals on their health insurance costs?

If you buy your own health insurance, you should definitely know about the long-standing health insurance premium deduction for the self-employed. 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. The deduction is for medical, dental or long-term care insurance premiums that self-employed people often pay for themselves, their spouse and their dependents. The insurance can also cover your child who was under age 27 at the end of 2012, even if the child was not your dependent.


Tax Information About Health Insurance Premiums

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) in 2013, up from 7.5% of AGI in 2012. The more favorable 7.5%-of-AGI threshold continues to apply through 2016 if you or your spouse has reached age 65 by the end of the tax year. If you are subject to the alternative minimum tax, total medical expenses must exceed 10% of AGI in 2012.


Deducting Medical Expenses on Tax Return

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 a “nonitemized” 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.  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.

Self-Employed Health Insurance Deduction

Also, no deduction is allowed to the extent that the deduction exceeds your earned income from the trade or business with respect to which the plan providing the medical care coverage was established.


Which Self-Employed Individuals May Deduct Health Insurance?

You may be able to take this deduction if one of the following applies to you:

  • You had a net profit from self-employment. You would report this on a Schedule C, Profit or Loss From Business, Schedule C-EZ, Net Profit From Business, or Schedule F, Profit or Loss From Farming.
  • You had self-employment earnings as a partner reported to you on Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc.
  • You used an optional method to figure your net earnings from self-employment on Schedule SE, Self-Employment Tax.
  • You were paid wages reported on Form W-2, Wage and Tax Statement, as a shareholder who owns more than two percent of the outstanding stock of an S corporation


Taking the Self-Employed Health Insurance Deduction

Rev. Proc. 2014-41, also released on July 24, 2014, provides methods for determining the section 162(l) deduction and the premium tax credit for health insurance costs of self-employed individuals who claim the deduction under section 162(l).


Additional IRS Resources for Self-Employment: