February 6, 2024
Health insurance premiums have increased significantly since the implementation of the Affordable Care Act and are now one of the most significant expenses for individuals. As part of itemized deductions, health insurance costs can be included in an individual’s medical expenses. However, it’s worth noting that only the portion of total medical expenses exceeding 7.5% of a taxpayer’s adjusted gross income (AGI) is deemed deductible under this condition, – featured in detail on the Schedule A form as incorporated in the Form 1040 tax return.
This article aims to serve two purposes. Firstly, it aims to remind you of the types of insurance that qualify for medical deduction. Secondly, it intends to provide insight into an alternative avenue for self-employed individuals to deduct their health insurance. This method avoids the AGI restriction and allows for a deduction without requiring itemization.
Let’s dive into exploring what qualifies as deductible health insurance, including premiums paid for yourself, your dependents, or your spouse, if that is relevant to you, for the plan types below:
- Medical and Hospitalization Insurance Coverage
- Extended Care Insurance (subject to age-related limitations)
- Medicare Part B Plan
- Medicare Part C, also known as the Medicare Advantage Scheme
- Medicare Part D Provisions
- Dental Care Insurance Policies
- Optical or Eye-Care-Related Insurance Coverage
- Premiums processed through a Government-regulated Marketplace after taking into account the Premium Tax Credit.
Important Reminder: Medicare premiums, which are covered via payroll taxes—often identified as the hospital insurance (HI) portion of the Federal Insurance Contributions Act (FICA) and self-employment taxes—typically do not meet the criteria to be considered medical expenses.
In addition, any premiums contributed by your employer towards your or your family’s health coverage are non-deductible. This is attributed to the fact that such payments do not form part of your wage income. Similarly, suppose you engage in contributions towards an employer-sponsored health plan using a “cafeteria” style payment system. In that case, these are executed with pre-tax dollars and hence cannot be itemized for tax deduction purposes either.
Deduction of Health Insurance for Self-Employed Individuals – If you’re working for yourself, part of a partnership, or own more than 2% of an S corporation, you can deduct 100% of the amount you paid for health insurance during the year. This is an above-the-line expense, so you don’t have to itemize it. You can claim this deduction for your medical insurance and that of your spouse, dependents, and children under the age of 27, irrespective of whether such children qualify as dependents or not. Deductions above-the-line are permitted without the necessity of itemizing them on Schedule A. In order to qualify for a Self-Employment (SE) health insurance deduction, you must meet one of the following criteria:
- Sole Proprietorships: Over the year, your business should have generated net profit as reported on either Schedule C – Profit or Loss from Business, or Schedule F – Profit or Loss from Farming. The value of this deduction cannot overshadow your sole proprietorship’s net earnings, which are insured through a specific plan. In this case, “net income” means the total profit from Schedules C or F after taking out 50% of the yearly tax break for self-employed people and/or contributions made to a qualified retirement plan, Simplified Employee Pension (SEP) Plan, or Savings Incentive Match Plan for Employees (SIMPLE). An insurance policy covering healthcare can be registered under your name or that of your business entity.
If uninsured medical expenses exceed the business’ net income over time, surplus costs could potentially be counted within total Schedule A medical charges if individual deductions are claimed.
- Shareholders in an S-Corporation possessing >2% holdings: If you belong to this category wherein your stake exceeds 2% in an S corporation, wages earned by you, i.e., Medicare-related salaries recorded within Form W-2’s box 5, will be treated equivalently as employment-based income. Accordingly, premiums paid out by listed corporations—duly reimbursed—will appear as salary entries reflected on employees’ Form W-2 documents. The related policy could be registered under the name of either the S Corporation or yourself as a shareholder.
- In the event that the S corporation is responsible for premium payments, these specific amounts are duly recorded as wages on Form W-2.
- Alternatively, if you, as the shareholder, bear responsibility for such premiums and hold ownership of the policy under your name, it becomes imperative that the S Corporation issues reimbursements. Further to this point, the premiums mentioned above must be reported on your personal W-2 form stated as wages. Non-adherence to these guidelines may fail to recognize and validate an insurance plan officially established under your respective business entity.
- Business Partnership – If you are part of a business partnership and accrue net income from self-employment for a particular year as stated on your Schedule K-1, you have the option to register your health insurance policy to be registered under either the business partnership’s name or under your personal name as an individual partner.
- If the business partnership pays the insurance premiums, they must report the amounts on your Schedule K-1, Form 1065, as guaranteed payments, which will be incorporated in the calculation of your total gross income.
- If the premiums are paid in your capacity as a partner and the policy is registered in your name, you must be reimbursed by the partnership. Furthermore, the premium amounts must be accounted for within your gross income as guaranteed payments, which are stipulated in Schedule K-1. Failure to do so will result in the insurance plan not being formalized under your business entity.
It is important to clarify that if you are self-employed and have a subsidized health plan available through an employer, your spouse, your dependent, or your child under 27 years of age, you cannot deduct your health insurance expenses for any month in which you are eligible to participate in the plan. A plan is considered “subsidized” if the employer pays at least half of the overall cost related to coverage expenses.
This guideline is distinctly applicable to:
(1) policies offering coverage for approved long-term care services or those acknowledged as qualified long-term care insurance contracts and
(2) various other categories of insurance policies.
Consequently, someone who qualifies for health insurance subsidized by their employer may still have the possibility to deduct long-term care insurance premiums as long as they do not qualify for long-term care insurance subsidized by their employer.
Premiums pertaining to health insurance categorized as an above-the-line Self-Employed health insurance expense cannot be simultaneously accounted for as a medical expense within Schedule A.
We realize that understanding the intricacies of health insurance premium deductions, whether it’s an itemized or above-the-line deduction for self-employed individuals, can be complex. If you have any questions or need further clarification on this topic, please don’t hesitate to contact us.
At Elite Business Accounting Solutions, Inc., we take pleasure in offering our clients the highest level of professionalism and quality in all that we do. See some of our clients’ glowing reviews to find out why working with Elite Business Accounting Solutions, Inc. is the right choice for you.