Who Can Claim the Self-Employed Health Insurance Deduction
- Self-employed people reporting income on Schedule F (for farmers) or Schedule C (other self-employed persons).
- General partners in a partnership and actively participating members in an LLC treated as a partnership who have self-employed income.
- Employees of an S-corporation who own 2% or more of the S-corporation's stock.
Types of Insurance that Qualify for the DeductionThe following types of insurance premiums can be deducted:
- Medical insurance,
- Dental insurance,
- Long-term care insurance,
Self-employed persons who pay supplemental Medicare premiums (such as for Part B coverage) can deduct those supplemental premiums as part of the self-employed health insurance deduction. (Source: CCA 201228037; see also: "Self-Employed Can Deduct Medicare Premiums, IRS Chief Counsel Advises," the Tax Advisor.)
Maximum Limit for the Self-Employed Health Insurance DeductionBefore claiming this tax deduction, you must calculate your allowable health insurance deduction. Take your self-employment income, and subtract the 50% deduction for self-employment taxes, and subtract any retirement contributions made to SEP-IRA, SIMPLE-IRA, or Keogh plan. The remainder is your allowable deduction for health insurance expenses.
Health Insurance Deduction in a Loss YearIf you are reporting a loss from your self-employed activity, then you are not eligible to deduct your health insurance costs since this particular deduction is limited by your self-employment income. You can however still claim the health insurance expenses as an itemized medical deduction on Schedule A.
Eligibility for Group Insurance Limits Your DeductionYou can deduct the full cost of health insurance you purchase for yourself, your spouse, and/or your dependents. However, you cannot deduct any insurance costs for any months you were eligible to participate in a subsidized group health insurance plan through your or your spouse's employer. For example, if you paid for 12 months of health insurance coverage for yourself and your family, but you became eligible to participate in your spouse's group health insurance in December, then you can deduct only 11 months worth of insurance premiums.
Where to Claim the DeductionYou claim the health insurance deduction as an "above the line" tax deduction on Form 1040. On the 2012 version of Form 1040, the self-employment health insurance deduction is located on Line 29. There's a worksheet provided in the Instructions for Form 1040 to calculate the deduction. (The worksheet is located on page 31 of the 2012 version of the instructions). There's a more detailed worksheet found in Publication 535 (page 19).
Any health insurance premiums that you cannot deduct directly on Form 1040, you may be able to deduct as a medical expense on Schedule A.
Special Rule for 2010 OnlySelf-employed persons are able to include their health insurance premiums as a deduction that reduces both their self-employment tax and their income tax for the year 2010 only. The deduction will still be taken on Line 29 of the Form 1040, and with an adjustment made the net amount of self-employed income subject to the self-employment tax on Schedule SE Line 3.
For 2009, health insurance reduces income tax only; it does not reduce the self-employment tax. For 2011 and later years, the self-employed health insurance deduction reduces income subject to the federal income tax and does not reduce the self-employment tax.
The health insurance deduction for self-employed persons is provided for in Internal Revenue Code section 162(l).
Last updated March 2, 2013.