The Self-Employed Health Insurance Deduction: A Valuable Personal Deduction

This special personal deduction allows self-employed people who qualify to deduct 100% of their health insurance premiums for themselves, their spouses, and their dependents.

If you're one of the millions of self-employed people who have to pay for their own health insurance for themselves and their families, you may be entitled to a special tax deduction. If you are, be absolutely sure you take it because it can be one of the largest deductions you have.

Self-employed people who qualify are allowed to deduct 100% of their health insurance premiums (including dental and long-term care coverage) for themselves, their spouses, and their dependents. It’s important to understand, however, that this is not a business deduction. It is a special personal deduction for the self-employed. This deduction applies only to your federal, state, and local income taxes, not to your self-employment taxes.

To qualify for the deduction, you must meet two requirements:

  • You Have No Other Health Insurance Coverage: You may not take the self-employed health insurance deduction if you are eligible to participate in a health insurance plan maintained by your employer or your spouse’s employer.
  • You Have Business Income: You may deduct only as much as you earn from your business. If your business earns no money or incurs a loss, you get no deduction. If you have more than one business, you cannot combine the income from all your businesses for purposes of the income limit. You may only use the income from a single business you designate to be the health insurance plan sponsor.

Designating Your Plan Sponsor

If you qualify, you get the health insurance deduction whether you purchase your health insurance policy as an individual or have your business obtain it. If you purchase your health insurance plan in the name of one of your businesses, that business will be the sponsor. However, the IRS says you may purchase your health coverage in your own name and still get the self-employed health insurance deduction. (IRS Chief Counsel Memo 200524001.) This may be advantageous because it allows you to pick which of your businesses will be the sponsor at the start of each year. Obviously, you should pick the business you think will earn the most money that year.

Moreover, if you have more than one business, you can have one purchase medical insurance and the other purchase dental insurance and deduct 100% of the premiums for each policy, subject to the income limits discussed above. This will be helpful if no single business earns enough income for you to deduct both policies through one business.

Tax Reporting

Because the self-employed health insurance deduction is a personal deduction, you take this deduction directly on your Form 1040 (it does not go on your Schedule C if you’re a sole proprietor). If you itemize your deductions and do not claim 100% of your self-employed health insurance costs on your Form 1040, you may include the rest with all other medical expenses on Schedule A, subject to the 7.5% of Adjusted Gross Income limit (for 2017 through 2019 under the Tax Cuts and Jobs Act). The limit is scheduled to go back up to 10% of AGI in 2010. You would have to do this, for example, if your health insurance premiums exceed your business income.

To learn more about what you can deduct, see Nolo's Personal Tax Deductions and Tax Breaks section.


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