If you’re self-employed, paying for your own health insurance can be a significant expense. However, the IRS offers a valuable tax break that can help reduce this burden. By claiming the self-employed health insurance deduction, you can deduct the cost of premiums for medical, dental, and qualifying long-term care insurance for yourself, your spouse, and your dependents. Here’s how to take advantage of this deduction and what you need to know to qualify.
Eligibility for the Deduction
To qualify for the self-employed health insurance deduction, you must be self-employed, whether as a sole proprietor, a partner in a partnership, or a member of an LLC treated as a partnership for tax purposes. You can claim the deduction for the months in which neither you nor your spouse were eligible for an employer-subsidized health plan.
How Much Can You Deduct?
You can potentially deduct 100% of the health insurance premiums you pay for yourself, your spouse, and your dependents, but the amount is limited by the income generated from your self-employment. If your business doesn’t make a profit or you report a loss, you won’t be able to claim this deduction.
Medicare premiums you voluntarily pay for coverage similar to private health insurance are deductible. However, premiums paid from non-taxable retirement distributions, such as those for public safety officers, are not eligible for this deduction.
Claiming Your Deduction
The self-employed health insurance deduction is an above-the-line deduction, which reduces your adjusted gross income (AGI). This is beneficial because a lower AGI can help you qualify for other tax benefits that might phase out at higher income levels. One of its key advantages is that you can claim this deduction without having to itemize on your tax return, making it especially valuable for self-employed individuals.
Deducting Long-Term Care Premiums
If you pay for long-term care insurance, you can also deduct these premiums, though the amount you can deduct depends on your age. For example, in 2024, individuals aged 40 and under can deduct up to $470, while those over 70 can deduct up to $5,880. These limits will increase slightly in 2025, providing additional relief for older individuals.
Special Rules for Partnerships and LLCs
If you’re a partner in a partnership or a member of an LLC that’s taxed as a partnership, you’re also considered self-employed. You can claim the self-employed health insurance deduction if you pay your own health insurance premiums. If your partnership or LLC pays the premiums for you, there are specific tax reporting rules to follow, but you can still claim the deduction on your personal return.
Health Insurance for Employees
If you run a business and pay for health insurance for your employees, those premiums are considered a deductible business expense. This deduction is claimed separately on the appropriate business tax form, such as Schedule C for sole proprietors, and is classified as an employee benefit expense. This is a separate deduction from the one you claim for yourself and your family’s health insurance premiums.
Limits for ACA Plans
If you purchased health insurance through the Affordable Care Act (ACA) marketplace, you can deduct the premiums you paid out of pocket, but only for the portion not covered by premium tax credits. For example, if your premium tax credits cover 60% of your total premiums, you can deduct the remaining 40% you paid. The amount paid by the tax credit cannot be included in your deduction.
Key Considerations
When claiming the self-employed health insurance deduction, several key factors must be considered. You cannot claim the deduction for any month you or your spouse were eligible for employer-sponsored health coverage, even if you didn’t enroll. The deduction also cannot exceed your net profit from your self-employment income. If you own multiple businesses, you can only claim the deduction for one, so choosing the business with the highest income is best to maximize your deduction. Additionally, if you and your spouse are self-employed, ensure each of you maintains a separate HSA to benefit from catch-up contributions fully.
The self-employed health insurance deduction can provide a significant tax benefit, helping offset the cost of paying for your own health insurance. By understanding the eligibility requirements and claiming the deduction properly, you can reduce your taxable income and possibly qualify for other tax benefits. With health insurance premiums rising, this deduction is more valuable than ever, giving self-employed individuals a helpful way to manage their healthcare costs while reducing their tax liability. Contact your Stephano Slack tax manager/partner at 610-687-1600 or [email protected] for more information.
Author Jackie Himes, CPA, partner, is a trusted authority in serving high-net-worth individuals and closely held businesses. She provides strategic financial guidance that fuels growth and sustainability. Jackie’s extensive experience in private equity enables her to navigate complex investment structures and maximize tax efficiencies, consistently delivering tailored solutions for her client’s success. She can be contacted at 610-710-4057 or [email protected].
Recent Comments