What is healthcare insurance deduction?
So, let’s first unpack what the deduction is. The health care insurance deduction would allow the self-employed who qualify to write off 100 of their insurance premiums.
This includes the premiums for your spouse, dependents and insurance plans that cover children up to 26 years old, even if they are not dependents. When you take the deduction, it will apply to only your federal taxes, state taxes and local income taxes but will not apply to any self-employment taxes.
Requirements for the healthcare insurance deduction
To be eligible for the deduction, two requirements must be met.
The first requirement is that you are not eligible to participate in a health insurance plan by your employer or your spouse’s employer. But say at some point in the year you or your spouse are eligible to participate in a health insurance plan by an employer, you can only claim health insurance premium write-ups for the months where you are not eligible.
How to calculate the deduction?
So, for example, say you were employed for six months of the year but decided to go ahead and leave your job and start a business for the remaining months.
In this scenario, you will be able to deduct the health care premiums you paid during the six months.
You are not employed now.
The second requirement is that your business must have earned income.
This deduction only allows you to deduct up to the earned income from your business, meaning the business profit needs to be greater than the amount you would like to write off.
So as an example, let’s assume your business has 8 000 in net income, aka profit, and you have ten thousand dollars in health care premium cost.
You can only deduct up to the eight thousand health care insurance premiums. Remember that you can’t deduct more than your net income, aka profit, with this deduction. Thus, if your business does not earn profit or records a loss, you will be unable to take this deduction now before we continue.
Plan sponsors
If you meet both qualifications, the IRS gives you the freedom to pay for the policy personally or have your business pay for it.
The IRS also gives you the flexibility to purchase health care insurance in your own name or in the business’s name.
If you decide to purchase your health insurance plan in the name of one of your businesses, that business will be the sponsor. If you have multiple businesses, you should choose the business you believe will earn the most profit when deciding who should be the sponsor of the plan in the instance where no one business will earn enough income to cover the total cost of your policy.
You can choose one business to sponsor, say your medical, and another business to be the sponsor of dental and still deduct 100 of the premium granted.
What businesses qualify?
While that deduction is amazing, not all business types qualify to write off health care for the owners, listen closely in general, sole proprietors partners in a partnership, LLC members and s corporation holders who own more than 2 percent of the company’s stock are eligible for this deduction because they’re considered employees of the business now if you solely own rental properties with or without an LLC health insurance, is not considered an allowable deduction for you simply because your rental property does not create self-employment income,
Can you deduct healthcare as a business expense?
If you have employees and pay for their health care, you can deduct that cost as a business expense. Still, the self-employed health insurance deduction is not a business deduction but a personal deduction for the self-employed. You see, you can’t have your business provide you with health insurance and then turn around and deduct that cost as a business expense if you are considered an employee, but there is a workaround.
If you want to take it as a business expense, you can hire your spouse as an employee, purchase a policy in your spouse’s name, and have the policy cover you. In this case, you can write off the health care costs of your wife as a business deduction because she is an employee of the business.
If you take this route, don’t also claim the health insurance deduction for the self-employed.
Claiming the healthcare insurance deduction
Your adjusted gross income is known as your AGI, and you can take it whether you itemize it. When you take the deduction, it will only apply to your federal taxes, state taxes and local income taxes but does not apply to self-employment taxes. When you file a deduction, it’s entered on schedule 1 Part 2 line 16 of form 1040 in the box, appropriately labelled self-employed health insurance deduction. If you qualify for the self-employed health insurance deduction, it’s a no-brainer to take it.