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Fundranker Blog—SE Health Insurance Deduction

SE Health Insurance Deduction

The self-employed health insurance deduction is a valuable "above-the-line" deduction for self-employed individuals. It reduces your adjusted gross income, which cascades to your benefit on Schedule A itemized deductions as well as various tax credits and possibly on your state income tax return. For 2008, new rules make it easier than ever to claim this deduction if you are a partner with net earnings from self-employment or a more-than-2% shareholder in an S corporation. The rule change is retroactive, so partners and more-than-2% shareholders in S corporations may be able to amend past returns to take advantage of this deduction, as well.

For purposes of this deduction, a self-employed individual is a person who files Schedule C, Schedule C-EZ, or Schedule F with Form 1040, a partner with net earnings from self-employment, or a more-than-2% shareholder in an S corporation with wages reported on a Form W-2. You may be able to deduct premiums paid for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents.

The insurance plan must be established under your business. This is easiest for self-employed individuals who file Schedule C, C-EZ, or F as the insurance plan can be either in the name of the individual or in the name of the business. Essentially, for a self-employed individual, you are your business, so it is the same thing. For self-employed individuals, the deduction generally is limited to the net profit from your business less one-half of your self-employment tax and your self-employed SEP, SIMPLE, and qualified plans deduction.

If you are a partner with net earnings from self-employment or a more-than-2% shareholder in an S corporation, the insurance plan can be in the name of the business or, and this is what is new for 2008, in your name. Your partnership or S corporation must either pay the premiums or reimburse you for premiums you pay, and either way, the premium amounts must be reported as income on Schedule K-1 (partnership) or Form W-2 (S corporation). If your partnership or S corporation reimburses you for only part of the insurance premium amounts, then only that part of the premium amounts is reported as income and is deductible.

You cannot include in your self-employed health insurance deduction health insurance premiums for any month you were eligible to participate in any employer subsidized health plan at any time during that month, even your spouse’s employer, and even if you didn’t participate. This rule is applied separately to plans that do and do not provide long-term care insurance.

The Form 1040 instructions, for some reason, mention self-employed individuals only in passing, give details for S corporations but fail to explicitly mention that the insurance plan may be in the name of the individual, and leave the information out completely for partners with self-employment income. Publication 535, on the other hand, does a thorough job of describing all these situations, so you can find the information, but you have to dig for it.

The IRS doesn’t allow you to double up on deductions, so any deduction you take for self-employed health insurance premiums cannot also be deducted as an itemized deduction on Schedule A of Form 1040. If your self-employed health insurance deduction is less than the total amount of premiums you paid for health insurance, however, you can deduct the remaining premium amount on Schedule A, but it will be subject to the 7.5% AGI reduction of medical and dental expenses.

If you are self-employed, a partner with net earnings from self-employment, or a more-than-2% shareholder in an S corporation, don’t miss out on the new and improved self-employed health insurance deduction.

Posted 3/19/09 11:30am ET in Tax Tips

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