Self-Employed Individuals are Still Entitled to Health Insurance Deductions
IRS makes it a point to inform individuals that there is a certain kind of tax deduction that is specifically available to those who choose to be self-employed and not work for any corporation. This deduction that the establishment speaks of is targeted to dental, medical and insurance premiums that are for the long-run. Usually, self-employed people pay for these bills themselves. They even cover those of their spouse as well as their dependents. This insurance also covers children who are under the age of 27 toward the end of the year 2016, even if said children are not dependents of the self-employed individual. The definition of a child is the daughter, son, stepchild, foster child or adopted child or the self-employed. Foster child defined is a child that has been placed with the self-employed individual by a placement agency that is authorized or by a decree, order or judgment of a court and of any competent jurisdiction.
Self-employed individuals who are entitled to this deduction meet the following requirements:
- They have a net profit that they received from their self-employment. The report and list this on Schedule C (this is the profit or the loss generated from a business), Schedule C-EZ (this is the net profit that is garnered from a business) or Schedule F (this is the profit or the loss that is obtained from farming.)
- They have earnings from their self- employment as partners and have been reported on Form 1065 which is also Schedule K-1. This is the Partner’s Share on the income, credits, deductions and the like.
- They figure out their net earnings and income from being self-employed by using a method that is optional and this is listed on Schedule SE which is also known as the Self-Employment Tax.
- They have paid wages that have been reported on Form W-2 which is the Statement on wages and taxes. They are regarded as shareholders and they own more than 2% of the over-all stock of a corporation listed as an S-corporation.
There are rules that apply to how exactly this insurance plan can be established. Self-employed individuals must follow the guidelines and make sure that they qualify:
- If they are self-employed and have filed Schedule C, Schedule C-EZ or Schedule F and the policy is possible to be listed under the individual’s name or the business’ name.
- If they are partners of a business, the policy is listed in their name or the name of the partnership and the partners pay premiums. If the policy is in the name of the self-employed individual and he or she pays the premiums, then the partnership must reimburse said individual and include these premiums and regard them as income and list it on their Schedule K-1.
- If they are shareholders of an S-corporation, the policy is listed in their names or the name of the S-corporation. Either the self-employed individual or the corporation pays the premiums. If the policy is under the name of the individual and he or she pays the premiums, then the S corporation reimburses the individual and also includes this premium and regard is as some kind of wage income and list it on Form W2.
As for Medicare premiums, these are voluntarily paid to obtain the insurance under the name qualified for health insurance that is private and possible to be used in order to figure out the deduction. The total amount that is paid for coverage of health insurance obtained from distributions on retirement plans that are nontaxable cannot be used to calculate this deduction.
Health Insurance Deduction Worksheet for Self-Employed Individuals
Each business or trade must be listed under a separate worksheet that has been established by an insurance plan.
- Enter the over-all amount that has been paid for the year 2016 that is solely for coverage of health insurance that is established and listed under the business. This can also be listed under an S corporation that the individual has more than 2% in shares. The mentioned health insurance is for the self-employed individual, the spouse as well as the dependents.
- List any amounts for the months that the self-employed individual is eligible in participating in health plans that are subsidized by the individual or the employer or the spouse or the employer of the dependents or the child who is below 27 by the last leg of 2016.
- List any amounts that have been paid from distributions of the retirement plan that were considered non-taxable because the self-employed individual was a safety officer for the public and is retired.
- List any health insurance that is a coverage payment and is included on the Form 8885 and specifically on line 4 in order to obtain the HCTC.
- List any monthly payments for HCTC that were made in advance and that was received by the administrator of the health plan from IRS, as depicted on the Form 1099-H.
- List any qualified health insurance that is a coverage payment that was paid for coverage months that are considered eligible and the self-employed individual has received in the form of a benefit through the monthly payment in advance of the HCTC program.
- For coverage that is listed under long-term insurance and is a qualified contract, every person that was covered must be entered. Total payments that were made for the specific person during the whole tax year must be listed.
- The amount depends on the age of the person by the end of the said tax year. It is $390 for individuals who are 40 or even younger, $730 for those between the age range of 41 and 50, $1460 for those who are between the age range of 51 and 60, $3,900 for those between the age range of 61 and 70 and $4,870 for those who are between the ages of 71 and older.
- The payments that were made for months that were eligible but subsidized by the insurance plan of the self-employed individual’s spouse or the employer of the spouse. Remember that if there is more than one individual that was covered, the amount should be entered separately. Then, once completed, enter the over-all amount.
- Add Line 1 and Line 2.
- Enter the net profit as well as earned income from the business or trade that the plan of the insurance was established. Do not put the payments for the program of Conservation Reserve because these payments are exempted from self-employment. If the business is listed as an S-corporation, proceed to Line Eleven.
- The amount of all profits that have been listed from Schedule C on Line 31 which is Form 1040, Schedule C-EZ on Line 3 which is Form 1040, Schedule F on Line 34 which is Form 1040, or Schedule K-1 on Box 14 and Code A which is Form 1065. Include any income that is allocable to the said profitable businesses. Do not include the payments made from the program of Conservation Reserve because these are already exempted from the tax of the self-employed. Check the instructions that are listed for Schedule SE which is also Form 1040. Net losses must not be included on any schedule.
- Divide Line 4 from Line 5.
- Multiply the Form 1040 or the Form 1040 NR which is found on Line 27 by the percentage amount listed on Line 6.
- Subtract the amount listed on Line 7 from the amount listed on Line 4.
- If there is any amount listed on Form 1040 or 1040 NR which is on Line 28 that is considered to be attributable to the business or trade in which the plan for the insurance has been established, then this must be entered.
- Subtract the amount in Line 9 from the amount in Line 8.
- Enter the Medicare wages that are listed in the Form W-2 and on Box 5 from the S corporation in which the self-employed individual has more than 2% of the shares and which established the insurance plan.
- Enter the amount that is listed on the Form 2555 and Line 45 and the attributable amount that is listed on Line 4 or Line 11. Any amount that is listed from the Line 18 of Form 2555-EZ can also be attributed alongside the amount that has been entered above Line 11.
- Subtract the amount from Line 12 from the amount in either Line 10 or Line 11.
- Enter the smaller amount between the one in either Line 3 or the one in Line 13 along with the amount on either Form 1040 or Form 1040 NR which is on Line 29. When figuring the total of the deduction on the medical expense listed on Form 1040 or Schedule A, this must not be included.
Sounds complicated – that is why people specialize in accounting. Please consult with your local CPA to discuss this.
How to Claim Health Insurance Deductions from Self-Employment
One of the reasons why more and more people choose to be self-employed is that they can deduct what they usually spend on premiums of health insurance which can be found on page 1 and above a line on the individual’s tax return. These self-employed individuals can also claim their medical expenses as a form of deduction, and this includes premium on health insurance. The catch is that they have to itemize the tax returns to get this done. The downside is that this is not always end up being a good deal to the individuals.
The overall cost of premiums that have been paid for insurance that is specifically for medical, dental and long-term purposes can be deducted in the policies that cover the individual, the individual’s spouse and the individual’s children, who are below the age of 27. If the self-employed individual pays supplemental premiums to Medicare, then these can also be deducted. Policies can be listed under the name of the business.
Limitations to Claiming the Health Insurance Deduction
Self-employed individuals cannot deduct the costs of insurance from their health benefits if they or their spouses were found eligible in participating in the subsidized health plan for groups that are obtained via the employer.
This is the case for those who work regular jobs and have their own businesses or their spouses are employed and are found eligible for the coverage that is under the health plan for the group.
The individual’s self-employment over-all income can be calculated and totaled on Schedule F and Schedule C and this must be the same amount or go beyond the amount of the deduction. Take this for an example. If the business has earned a total of $12,000 but the premiums cost $15,000 then the individual cannot claim the whole $15,000. He can claim only the $12,000 amount. If the business reports some kind of loss, then the individual will not be considered eligible for health insurance deduction. He or she can still obtain the health insurance amount that has been itemized on the medical deduction that is listed on Schedule A but the amount that is listed “above the line” and its adjustment is more advantageous to the self-employed.
Self-employment taxes are also based on the total business income minus the other expenses – this is the income that is calculated and listed on Schedule C, but this is not less than the individual’s insurance premium. That is regarded as a break in the double tax.
When claiming the deduction, the self-employed individual can enter this on Form 1040 located in Line 29. There is a worksheet that is provided in the Instruction Guide for Form 1040 and provides a step by step on how to calculate the total amount of the deduction. A more detailed practice worksheet can be located in the Publication 535 guide. These worksheets can be used for practice and can also amount to the deduction that can be obtained in health insurance for the self-employed individual. Worksheet P can also be used and is found in Premium Tax Credit which is Publication 974.