The last several years of economic uncertainty and high unemployment have inspired many people to become self employed. For entrepreneurs who don’t have access to a spouse’s group health insurance plan, being self employed usually means purchasing a policy in the individual health insurance market.
And for those who are used to having an employer cover all or most of the premiums on a group plan, paying the entire premium for an individual policy can induce a bit of sticker shock.
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.
For now, the self employed have several deductions and tax credits to utilize:
Deduction for 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.
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.
HSAs allow insureds to pay for medical expenses with pre-tax dollars
Although being self employed means that there’s no employer footing the bill for health insurance, it also gives entrepreneurs a lot of flexibility in terms of what type of health insurance they purchase. One popular option is an HSA-qualified high deductible health plan (HDHP).
Coverage under an HDHP makes the insured eligible to open an HSA and make pre-tax contributions that can be used later to pay for medical expenses. In 2013, the contribution limits are $3,250 for a single individual and $6,450 for a family.
The contribution is deducted “above the line” on the 1040, which means it’s available to filers regardless of whether they itemize deductions. And although the money can be withdrawn without penalties or taxes to pay for qualified medical expenses, some insureds choose to treat their HSAs as secondary retirement accounts, with tax implications similar to traditional IRAs: contributions are tax deductible and distributions during retirement are taxed as income.
ACA tax credits make individual health insurance more affordable
As of January 2014, federal tax credits – obtained via the exchanges – will help many families subsidize the purchase of individual health insurance. The tax credits will be available to households with incomes under 400 percent of the federal poverty level (FPL) (about $46,000 for a single individual and $94,000 for a family of four), as long as the enrollees do not have access to employer-sponsored health insurance that is considered affordable.
The subsidies can be paid directly to health insurance carriers on a monthly basis to reduce the amount that insureds have to pay for their coverage.
For eligible self-employed people, the tax credits will make individual health insurance significantly more affordable than it would otherwise be. And since the ACA also does away with medical underwriting in the individual health insurance market, people who avoided entrepreneurship in the past because of pre-existing health conditions will find that individual health insurance is much easier to get starting in 2014.
One last write-off to consider
If you face high medical bills, be aware that that you might be able to deduct some of your expenses. The deduction – found on Schedule A of your income tax return – covers all types of medical expenses.
But only expenses in excess of 10 percent of your adjusted gross income can be deducted. The threshold used to be 7.5 percent (through 2012), and for filers who are at least 65 years old, medical expenses that exceed 7.5 percent of adjusted gross income can still be deducted through the end of 2016.
But starting in 2017, all filers will be limited to deducting only medical expenses that are in excess of 10 percent of their AGI, which can be a hard target to hit unless you’re dealing with a significant illness or injury.
Still, it’s one more good reason to keep track of your medical bills – just in case.