Self-employed health insurance deduction

Millions of self-employed Americans have been filing for the self-employed health insurance deduction since it was introduced in 1987. Congress made the full deduction permanent in 2003.

As the economy continues to sputter and millions of Americans face downsizing and a tight job market, more folks are putting up a shingle and becoming self-employed entrepreneurs. On their own and often without access to group health insurance, they are left to the mercy of the individual insurance market, an expensive and unpredictable place.

That’s why it’s important for the self-employed to know all the ways they can save a few dollars here and there. One obvious place to look is on their tax forms, but one look isn’t enough: federal deductions for health insurance change regularly, so keep up with code changes. (Just to be clear, the recently passed health reform law didn’t affect any of the following deductions.)

For now, the self employed have several deductions to watch:

deduction for the self employed isn’t new

If you’re on your own, you should definitely know about the long-standing health insurance premium deduction for the self-employed.

Congress implemented a 25 percent deduction on self-employed health insurance premiums in 1987 and made it permanent in 1994. The self-employed received even better news in 2003 when premiums became 100 percent deductible. Today, the IRS says this deduction is claimed on 3.6 million tax returns and was worth a total of $21 billion in 2008.

The deduction – which you’ll find on Form 1040, Line 29 – allows self-employed people to reduce their adjusted gross income by the amount they pay in health insurance premiums during a given year. You’ll find the deduction on your personal income tax form, and you can file for it if you were self-employed and showed a profit for that year or received wages from an S corporation in which you were more than a 2 percent shareholder.

You can’t take the write-off if you were eligible for a group insurance from your or your spouse’s employer.

future deduction possible

Beyond that well-known premium deduction, the self employed should know about a one-time health insurance deduction. The deduction – found on Schedule SE for Tax Year 2010 – is similar to the regular health insurance deduction.

The difference? It allows you to take the premium off of your business income more directly, which is more beneficial, because it reduces your Social Security payroll tax burden. For Tax Year 2010, you can use both health insurance deductions.

The National Association for the Self-Employed estimates there are more than 23 million self-employed Americans who represent 78 percent of all small businesses in the U.S. The one-year tax deduction on payroll taxes will save each self-employed business owner between $450 to $1,000 on their 2010 taxes.

The bad news? Congress approved the deduction for one year only, as a way to support small business during the rough economy. That means you can get the deduction only if you have not yet filed your 2010 taxes – or if you would consider filing an amended return.

The good news? Advocacy groups for the self-employed and small business are seeking an extension of the deduction, and a bill was introduced in the House in March to do so. They argue the deduction would level the playing field between the self-employed and corporations, which can deduct the cost of health insurance premiums as a business expense.

“For far too long, the self-employed have not received the same tax treatment as big business in regards to health care costs,” says NASE Executive Director Kristie Arslan. “The creation of a permanent tax deduction will right that wrong by allowing sole proprietors to deduct their health premiums as a business expense.”

The bill faces an uphill battle at a time when Congress has tightened its purse strings, but Kristin Oberlander, NASE spokesperson, says advocates are optimistic. “Maybe when the talk about the budget and deficit settles out a little bit, we can redouble our efforts to get it passed,” she says.

one last write-off to consider

You should also at least know about a possible medical expense deduction. If you face high medical expenses, consider using this deduction as well (though it can’t overlap with the other deductions for your health insurance premiums).

The deduction – found on Schedule A of your income tax return – covers all types of medical expenses. It can be used only if the expenses add up to at least 7.5 percent of your adjusted gross income, which can be a hard target to hit for most people.

Still, it’s one more good reason to keep track of your medical bills – just in case.

Jan Greene is a long-time health care writer who has been reporting about the health care system for nearly 20 years. Her work has appeared in the Los Angeles Times, Health magazine, OnHealth.com and a variety of trade publications for doctors and health care organizations.

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