July 22nd, 2019
It seems like we’re getting a lot of questions both at our live seminars and via our Facebook group regarding the self-employed health insurance deduction. So, this appears to be as good a time as any to revisit the rules….for brevity we’ll keep this discussion to self-employed taxpayers. In the future, we’ll address this same issue as it applies to partners in partnerships or shareholders in S corporations.
Rule #1: As the name suggests, you need to be self-employed…that in itself would seem to be a straight forward fact but it’s just the beginning.
Rule #2: To take a self-employed health insurance deduction as an adjustment to income (now found on Schedule 1 of the marvelous new Form 1040), you have to have business profit and the amount you can deduct as an adjustment to income is limited to that profit. This is defined as your Schedule C profit, for example, less the other business related adjustments to income such as one half of self-employment tax and any pension contributions treated as adjustments to income (think SEP for yourself).
If you end up being limited, the remainder can still potentially be deducted as a Schedule A medical expense. Be aware the health insurance premiums are not a direct business expense, and therefore don’t get reported anywhere on the Schedule C. Even if you pay the premiums from the business account, they do not reduce the business’ taxable income or self-employment tax.
Rule #3: You can’t be eligible for group insurance elsewhere (such as through your spouse’s employer), even if it’s lousy coverage. And a bigger complication is that this eligibility is determined on a month-by-month basis during the year. The key is not if you purchase health coverage through your spouse’s employer, but rather are you eligible to obtain coverage through your spouse’s employer. And, by the way, that rule applies for you if you are an employee in addition to your self-employment activity, and you are eligible for coverage through that employer.
Rule #4: The coverage must be purchased in the name of the business. That is the general rule. However IRS Publication 535 tells us that if you’re filing Schedule C, C-EZ or Schedule F, the policy can be in either your name or the name of the business.
Rule #5: Health insurance purchased through the healthcare exchanges (what you actually pay out of pocket), long-term care premiums, and Medicare Parts A through D can also be considered self-employed health insurance. Healthcare sharing ministry costs are not considered self-employed health insurance.
In a future blog, we’ll consider employing your spouse in the business and looking at opportunities to turn your paid premiums into Schedule C ordinary business expenses…
by Tom O’Saben, EA
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