Three Tests That Decide Your Self-Employed Health Insurance Deduction
By The self-employed health insurance deduction is one of the most valuable adjustments available to you. It reduces adjusted gross income dollar for dollar; you get it whether or not you itemize, and the lower adjusted gross income can preserve other benefits that phase out as income rises.
It is also one of the easiest deductions to lose. Three tests decide whether your premiums count:
- Was the plan established under your business? If you are a sole proprietor or a partner, you have flexibility. The policy can sit in the name of the business or in your own name.
If you are an S corporation shareholder who owns more than 2 percent, you have no such flexibility. The premiums must run through payroll and appear as wages in box 1 of your Form W-2. Pay them personally and skip that step, and the self-employed health insurance deduction disappears.
- Were you eligible for subsidized employer coverage? You lose the deduction for any month you were eligible to participate in a subsidized plan maintained by an employer—yours, your spouse’s, or that of a dependent or a child under age 27.
Note that eligibility alone is the disqualifier. If your spouse declines employer coverage in favor of your policy, those months are gone.
- Is it medical care insurance? Disability income coverage, accidental death and dismemberment policies, and fixed-benefit hospital indemnity plans are not medical care insurance and do not qualify.
There is one more limit: the deduction cannot exceed your net earnings from the business under which the plan was established.
If you want to discuss the self-employed health insurance deduction, please call me directly at 408-778-9651.