There are tax benefits available to self-employed individuals who pay health insurance costs. Self-employed taxpayers can deduct 100% of their health insurance costs in computing their income taxes.
Let’s review the tax rules on health insurance premiums. Health insurance premiums paid by non-self-employed taxpayers are deductible as itemized medical expense deductions, but only to the extent your total medical expenses exceed 7.5% of your adjusted gross income (AGI). For tax years ending after 2018, medical expenses will be subject to a 10%-of-AGI floor, instead of the 7.5%-of-AGI floor.
Because of the “floor” that applies to the medical expense deduction, if total medical expenses don’t exceed 7.5% of AGI (or 10% after 2018), no itemized deduction is available. Also, with the increased standard deduction there will be fewer taxpayers that can itemize so it more advantageous to deduct these premiums through the business if possible.
A self-employed taxpayer can deduct medical insurance premiums -as an “above the line” deduction, reducing taxable income for 100% of the health insurance costs for the taxpayer, spouse, and dependents.
The health insurance deduction for self-employed taxpayers only applies for any calendar month in which you aren’t otherwise eligible to participate in any other subsidized health plan.
Also, the deduction can’t exceed your earned income from the trade or business for which the health insurance plan was established.
These rules also apply to sole proprietors, partners in partnerships and more-than-2% shareholders of S corporations where the company pays for health insurance coverage for its owners, partners or shareholders.
The tax benefits of a self-employed individual’s health insurance costs can effectively reduce your cost of health insurance. You may wish to consider stepping up your coverage considering these savings. Contact us if you wish to discuss how these rules apply to your particular situation or if you have any questions.
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