Health Insurance Deduction for the Self-Employed

If you're self-employed and your business has a net profit, you may deduct medical, health, and qualified long-term care insurance premiums for yourself, your spouse, and your dependents on Form 1040, Line 29 instead of Schedule A.

This means the deduction is not subject to the Schedule A medical expense limitation where, for individuals under 65, medical expenses must exceed 10% of adjusted gross income to get a tax benefit (the AGI floor for individuals 65 or over is 7 1/2% of AGI).

The insurance can also cover your child who was under age 27 at the end of the year, December 31, even if the child was not your dependent.

A child includes your son, daughter, stepchild, adopted child, or foster child. A foster child is any child placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

Note: The 7 1/2% of AGI exception for taxpayers 65 or older will be in effect from 2013 through December 31, 2016. Unless Congress extends this exception, starting in 2017, medical expenses for taxpayers 65 or older will also have to exceed 10% of AGI to get a tax benefit.

Medicare Premiums:

Medicare premiums you voluntarily pay to obtain insurance in your name that is similar to qualifying private health insurance can be used to figure the deduction.

Retirement Plans:

Amounts paid for health insurance coverage from retirement plan distributions that were nontaxable because you are a retired public safety officer cannot be used to figure the deduction.

To claim the health insurance deduction on Form 1040, Line 29, one of the following statements must be true:

  • You were self-employed and had a net profit on Schedule C, Schedule C-EZ, or Schedule F.
  • You were a partner with net earnings from self-employment reported on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., box 14, code A.
  • You used one of the optional methods to figure your net earnings from self-employment on Schedule SE.
  • You received wages in 2015 from an S corporation in which you were a more-than-2% shareholder. Health insurance premiums paid or reimbursed by the S corporation are shown as wages on Form W-2, Wage and Tax Statement. If you are a more-then 2% S corporation shareholder and the S corporation has a health insurance plan, your health insurance deduction cannot be more than your wages from the S corporation.

Learn more about how an S corporation handles health insurance premiums and the deduction rules for shareholder-employees.

If You Were Eligible to Participate in an Employer Plan

If in 2015 you were eligible to participate in any employer-subsidized plan (including your spouse's) during any month, you may not claim the deduction for any of those months.

If Health Insurance Premiums Exceed Net Profit

If you're self-employed, the health insurance deduction may not exceed the net profit from the business under which the health insurance premiums are paid.

If your your health insurance premiums exceed net profit, deduct the amount of the premiums that are equal to your net profit on Form 1040, Line 29. The excess amount of the premiums are claimed on Schedule A.

For example, if your Schedule C net profit is $2,000 and your premiums are $2,500, you deduct $2,000 on Form 1040, Line 29 and $500 on Schedule A as an itemized deduction.

Self-employment tax: When computing self-employment tax, do NOT reduce net earnings from self-employment by your health insurance deduction.

Net Loss:

If you have a net loss, all of the premiums must be deducted on Schedule A along with your other medical expenses.

More than One Business:

If you have more than one unincorporated business, you cannot add up the profits from each business and use that total to determine your net income ceiling. Only the net income for the business for which the plan is established is considered.

Insurance Plan Must Be Established, or Considered to be Established, Under Your Business

Self-employed Individuals:

For self-employed individuals filing a Schedule C, C-EZ, or F, a policy can be either in the name of the business or in the name of the individual.

Partners:

For partners, a policy can be either in the name of the partnership or in the name of the partner.

You can either pay the premiums yourself or the partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income.

However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.

More-than-2% Shareholders of an S corporation:

For more-than-2% shareholders of an S corporation, a policy can be either in the name of the S corporation or in the name of the shareholder.

You can either pay the premiums yourself or the S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income.

However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 in box 1 as wages to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.

Limited Liability Companies

An LLC can deduct the cost of obtaining group hospitalization and medical insurance for all employees who are not members of the LLC.

Restrictions:

An LLC member is ineligible to deduct the cost of health insurance for any month during the year the member is eligible to participate in any other employer provided health plan. It is irrelevant whether you take advantage of the other health plan or not. This is relevant to LLC members who have employment earnings from non-LLC activity or have a working spouse that is eligible to include the LLC member in a health insurance plan.

Other Medical Expenses

If you're eligible to claim an above-the -line deduction for health insurance premiums and have other medical expenses, such as co-payments for office visits to doctors, prescriptions, etc. of course you may claim them on Schedule A if you itemize your deductions.

Tip: Although medical expenses must exceed 10% of adjusted gross income (7 1/2% for taxpayers 65 or older) to get a tax benefit for federal tax purposes, this limitation may not apply for state tax purposes. For example, in Arizona you can deduct 100% of medical expenses. There is no AGI floor that must be exceeded to get a state tax benefit, regardless of age. Check with your state.

Note: The lower 7 1/2% AGI floor for taxpayers 65 or older will stay in affect until December 31, 2016. Unless Congress extends this exception for older taxpayers, medical expenses for these taxpayers will also be subject to the 10% AGI floor.

Qualified Long-Term Care Insurance Policy for Self-Employed Persons

Part of the premium of a qualified long-term care insurance policy is deductible depending on your age at the END OF THE YEAR.

If you are self-employed, the part that is deductible is included as an above-the-line deduction on Line 29, Form 1040 along with your other medical insurance premiums.

For 2015, the maximum deductible premium for each person covered under a qualified long-term care policy is:

  • Limit on premium allowed as medical expense
    • Age 40 or under: $380
    • Over 40 but not over 50: $710
    • Over 50 but not over 60: $1,430
    • Over 60 but not over 70: $3,800
    • Over 70: $4,750

Make sure, if you are thinking about purchasing a long-term care insurance policy that it qualifies for the tax treatment explained here.

For example, the contract must:

  • Provide only for coverage of long-term care services.
  • Be guaranteed renewable.
  • Not provide for a cash surrender value.
  • Not provide that money can be assigned, pledged, or borrowed.
  • Not reimburse expenses covered by Medicare UNLESS Medicare is a secondary payer OR the contract makes per diem payments without regard to expenses.

Generally, you can exclude benefits (other than dividends) received under a qualified long-term care insurance contract from income.

However, if you receive per diem payments (payments made without regard to actual expenses), you are limited to the amount you can exclude from income.

Form 1099-LTC is issued to recipients of payments under a long-term care insurance contract.

Box 3, of Form 1099-LTC, should indicate whether the payments were on a per diem basis or reimbursements of actual long-term care expenses.

You use Form 8853 to report per diem payments and reimbursements and to determine if any of the per diem payments are taxable.

File your personal and small business taxes (Schedule C)