Self-Employed Health Insurance Tax Deduction

Many people don’t realize that if they are self-employed, they may be able to deduct premiums paid for dental, medical, and qualifying long-term care insurance coverage for themselves, their spouses and any dependents. If you are self-employed, this is a deduction that you certainly want to take advantage of.

How Does the Self-Employed Health Insurance Write Off Work?

One of the convenient things about this particular write off is that you benefit, whether you itemize your deductions or not. This write off is claimed on page 1 of Form 1040. Additionally, unlike itemized deductions, the self-employed health insurance write off is beneficial because it automatically lowers your adjusted gross income (or AGI). Having a lower AGI is useful because it reduces the chances that you’ll be negatively affected by unfavorable phase-out rules that may reduce or eliminate some tax breaks. Taking this deduction, however, means that you cannot deduct the premiums you’ve paid when calculating your self-employment tax liability.

How is Eligibility for the Self-Employed Health Insurance Write Off Determined?

There are three important eligibility determinations that you should be aware of:

  • There is an earned income limitation. Basically, this means that the deduction cannot be more than the earned income you’ve made.
  • Eligibility is determined month by month, not by tax year. This means that you can claim this deduction only during months when neither you nor your spouse was eligible for a health care plan subsidized by an outside employer.
  • Partners and LLC members who are treated as partners for tax purposes are considered to be self-employed. If you are in either of these categories and directly pay premiums for your own health insurance, you can claim the self-employed health insurance write off on page 1 of your 1040 form. In either situation, the month-by-month eligibility rule still applies.

What Are Some Strategies for Tracking My Insurance Premium Payments So That I Can Claim the Deduction?

Keeping documentation of what you’ve spent for health, dental and qualifying long-term care insurance premiums is important. These simple tips should help:

  • Print a hard copy of your tax return from the previous year if you took the deduction. Circle or highlight the deduction so that you have a record of what you’ve done in the past.
  • Use a credit card to pay your premiums when possible. This is a way to easily create a paper trail.
  • If you do freelance or contract work, set up a separate bank account for your business and business expenses. This, again, allows you to create a paper trail and document any potential write-offs.
  • Save all your receipts. Have a designated envelope or file folder where you store receipts and payment stubs for anything you intend to write off, including your health insurance premiums.

What Happens if I Do Not Take the Self-Employed Health Insurance Tax Deduction?

In short, if you are self-employed and paying your own medical, dental, and qualifying long-term care insurance premiums and do not take advantage of this tax deduction, you are losing money. You are effectively paying the IRS more money than they are entitled to. This write off affects your adjusted gross income and could have a much bigger financial payoff than you realize. It is recommended that you consult an enrolled agent and ask him or her to prepare your taxes or at least provide you with appropriate guidance.

When I simplify both the numbers and the rules of law, I will explain everything to you that we need to do in such a clear fashion that your taxes no longer become a “hope for the best” situation and become an understandable process in the growth of your life and your business.

~Joshua Berman 720.336.0950