Self-Employment Health Insurance Tax Deduction
Insurance for the self-employed is a deductible expense. While this deduction is readily available, rules for deducting the expense depend on the type of entity a person owns and her position within it.
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Sole Proprietor
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A sole proprietor is a self-employed individual who owns and operates her own company. She is required to file a Schedule C along with her 1040 to record all income and expenses for the business. The exception to this is all salary and benefits that are attributed directly to an owner. These items are not deductible as a direct expense to the business. Because of this, a sole proprietor will effectively pay more in self-employment tax, which increases her overall tax liability. The deduction for a sole proprietor's health insurance premiums is on Line 29 of her 1040 tax return.
Partnership
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A Partnership is an entity in which two or more people form a relationship to operate a business for profit. This entity is required to file a form 1065 to record business income and expenses and, unlike the sole proprietor, the entity is allowed to include the benefits of the owners as expenses on a tax return. While this may seem a benefit at first glance, the owner is really no better off than the sole proprietor when it comes to the health insurance deduction. The partnership is allowed the deduction as a business expense; however, the partner must include these items in his individual gross income.
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S-Corp Election
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The S-Corp is an organization that files taxes as a type of corporation. The benefit of this entity is that it reduces overall tax liability for the owners; however, precise rules must be followed for anyone who is more than a 2 percent shareholder. A 2 percent or more shareholder may deduct health insurance on the S-Corp tax return only if the individual pays for his insurance through payroll. This obviously will increase the W-2 income of the shareholder; however, in this case, the shareholder is allowed to deduct on Line 29 of the 1040 the additional income attributed to health insurance.
Disallowed Deductions
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Any health insurance payment made in a month that a person was eligible for insurance coverage from either a former employer or a spouse's employer is not eligible for a deduction. In addition, a deduction is not allowed for long-term-care insurance if a person has met the terms and was eligible under a spouse's or other employer's plan.
Health Savings Account
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The self-employed individual can also take advantage of an HSA, or Health Savings Account, for deducting health insurance costs. This program coincides with a high deductible health plan and allows the individual to build a savings account for medical expenses. The contributions made to this type of plan are exempt from taxes, and can be used for anything medically necessary. The high deductible plans usually cost less and, in most cases, the combination of health premium deduction and HSA deduction increases the overall allowable deduction over deducting the premium alone.
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