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Health insurance deduction: Self-employed catch a break
If you have self-employment income, you may be able to claim a deduction for health insurance expenses incurred for yourself, your spouse and your dependents.
You will claim the health insurance deduction on page 1 of Form 1040, whether or not you itemize your deductions. Any health insurance premiums that you cannot deduct directly on Form 1040, you may be able to consider if you itemize your deductions.
Self-employed people include farmers reporting income on Schedule F or others reporting income on Schedule C. General partners in a partnership and actively participating members in an LLC treated as a partnership may also have income from self-employment. Likewise, employees of an S corporation who own 2 percent or more of the S corporation’s stock may be entitled to the deduction.
The deduction cannot exceed your net self-employment income. This limit is calculated by subtracting from your self-employment income 50 percent of your self-employment taxes and any retirement contributions you make to a SEP-IRA, SIMPLE-IRA or Keogh plan.
If you report a loss from your self-employment activity, you’re not eligible for this deduction. However, you can still claim the health insurance expenses as an itemized medical deduction.
In addition, you cannot deduct the insurance premiums for any months you were eligible to participate in a group health insurance plan through your or your spouse’s employer.
In recent advice, the IRS Chief Counsel has concluded that a self-employed individual can deduct Medicare insurance premiums in computing adjusted gross income (CCA 201228037).
The Chief Counsel also advised that:
The premiums for all Medicare parts, not just Part B, are eligible for the deduction.
A self-employed individual can pay the premiums directly and be reimbursed by the employer, or the premiums may be paid by the employer (the partnership or S corporation). Sole proprietors must pay the premiums directly.
Medicare premiums can be deducted for coverage of the self-employed individual’s spouse, dependent or child (assuming the child is not age 27).
Self-employed individuals who failed to deduct Medicare premiums for prior years may file an amended return to claim the deduction.
Prior to 2010, the IRS instructions for Form 1040 specifically said, “Medicare premiums cannot be used to figure the [self-employed health insurance] deduction.” For 2010 and 2011, the instructions were changed to say, “Medicare Part B premiums can be used to figure the deduction.” Now the IRS has clarified that all Medicare premiums qualify for the deduction.
The technical information here is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS.
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