Self-Employed Heath Insurance Deductions
Taxes and health insurance are topics of interest to anyone who works, or needs medical care. Of course, if you are self-employed, there is an added level of complexity and the tax ramifications of medical coverage can be significant. Understanding your options is vital to making an appropriate selection.
Other People Are Reading
-
Medical Expenses
-
Firstly, understand that medical expenses themselves are tax-deductible. That means every dollar one spends on medical care effectively becomes invisible to the IRS. If you make $50,000 in one year and spend $10,000 on medical expenses, the IRS only considers your income for that year to be $40,000. The IRS definition of "medical expenses" includes fees for the services of personnel like doctors, nurses, technicians and other people providing direct medical care. But, it also captures the costs of prescription medication, equipment like wheelchairs, catheters and other apparatus and even transportation, meals , lodging and other living expenses. But, be aware that this only applies to costs incurred in seeking or using care for medical purposes.
Self-Insurance
-
If you are self-employed various options exist for heath insurance and each has unique tax implications. First, there is "self-insurance". The self-insured person assumes the full cost of his medical care, trusting that his resources will be sufficient to cover whatever medical costs arise. In doing so, if no medical costs are incurred, his taxable income will not be affected. That is, if he makes $50,000 in a particular year, he must pay taxes on that sum (modification by other deductions notwithstanding). If medical expenses are incurred, then they are deductible as explained above.
-
Comprehensive Plans
-
Another option is the use of traditional medical insurance. One of the attractive features of employer-provided medical insurance is that it provides a service for the employee without increasing the tax burden of the employee. Self-employed people can obtain insurance in a similar way and the premiums are deductible. However, be aware that this deduction is not available if you or your spouse are eligible for an employer-subsidized plan via another employer. Also bear in mind that any medical expenses not covered by insurance are themselves deductible.
Health Savings Accounts
-
Health savings accounts are also hailed as ways to provide for health care needs while garnering tax advantage. HSAs are available to traditionally employed or self-employed people, but to be eligible, you must be enrolled in a high deductible health plan. These plans require significant out-of-pocket payments before the insurance "kicks in", but because of this, tend to have lower monthly premiums. The HSA is an account into which the owner can deposit money for future medical expenses. Money deposited, up to certain limits, into the account is not taxed and grows tax-free. Withdrawals from the HSA for medical expenses are also not taxed. Various fees or penalties may apply for withdrawals for other purposes.
Final Decision
-
The matter can be quite complicated in the details. In addition to the complex federal rules, various states and territories have their own rules. If the sums involved are large or there are outstanding medical issues making fine distinctions into dire matters, be sure to consult a professional. Accountants may have the requisite knowledge. Some lawyers specialize in taxes or issues facing small businesses. If you are concerned about the profit motive of insurance consultants, there are fee-based consultants who will find the best product for you, charging a fee instead of taking a commission on what they sell.
-
References
- Photo Credit medicine image by Joyce Wilkes from Fotolia.com
