HEALTH CARE DEDUCTIONS

Here's a Tip on How to Deduct Your Health Insurance Premiums

The general rule regarding the deductibility of health insurance premiums says that your health insurance premiums are combined with other out-of-pocket medical expenses and, to the extent the total exceeds 7.5% of your adjusted gross income, you may claim the excess as an itemized deduction. Unfortunately, for most people, the 7.5% hurdle is very difficult to clear. In addition, if you do not itemize, you get no tax benefit at all.

Eligible self-employed taxpayers, on the other hand, are permitted to deduct 100% of the cost of their health insurance premiums on Page 1 of their Form 1040. 

”Self-Employed” Means More Than You May Think.

For purposes of this rule, if you are:

• A sole proprietor
• A partner
• A member of a limited liability company (LLC) 
• A  more-than-2% shareholder in an S Corporation you are considered to be self-employed. However, your underlying business must be one in which the personal services you provide are a material income-producing factor. For example, a partner or LLC member who provides only capital to the business will not qualify. 

Are There Any Restrictions?

For an employer-subsidized plan--The deduction applies only for calendar months when you are not eligible to participate in a subsidized health plan maintained by another employer (including your spouse’s employer).

Earned Income--The deduction applies only if the medical insurance plan is established by the taxpayer's business and may not exceed the individual's earned income from that business.  

What Expenses Qualify?

The costs of medical, dental, and qualifying long-term care insurance payments paid for you, your spouse, your dependents, and any nondependent children under the age of 27, are qualifying expenses. In addition, Medicare Part B premiums are considered medical insurance premiums for the purposes of this deduction.

Are There Any Additional Tax Benefits?

For the 2010 tax year only, the 2010 Small Business Act allowed the health insurance deduction to reduce not only income on Page 1, but was applied in calculating net earnings from self-employment for purposes of self-employment tax.

The tax benefits described above related to your individual health insurance costs generally result in a lower effective cost of health insurance coverage. Please contact Marti Kinsel if you wish to discuss how these rules apply to your particular situation or if you have any questions.