The History of Self-Employed Health Insurance Deductions
In its publication, "The General Explanation of the Tax Reform Act of 1986," the U.S. Congress touted the legislation as "one of the most sweeping revisions of the Federal income tax system since its inception." The Tax Reform Act of 1986 included the first health insurance deduction for self-employed persons. The deduction is one way that the tax code became fairer, one of the key reasons for the reform, along with becoming simpler and more efficient.
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Argument for Fairness
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Self-employed persons had lobbied for tax parity with small-business owners for many years. One point of contention was that small businesses could deduct the health insurance premiums they paid for their employees, but the self-employed could not deduct the premiums they paid for themselves and their dependents. The Tax Reform Bill took the first step forward in redressing that grievance. Beginning in 1987, self-employed persons who earned a net profit could take up to 25 percent of the health insurance premiums paid for themselves and their dependents as a personal deduction under certain conditions. For example, the deduction could not be taken if a spouse's employer offered coverage that could be extended to include the entire family.
Path to Permanence
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Originally intended to be in effect only until the end of 1989, the 25 percent deduction was extended several times. The Omnibus Budget Reconciliation Act of 1990 extended it until the end of 1993. The Health Insurance Tax Act of 1995, signed into law by President Clinton in April of that year, made the deduction permanent and made it retroactive for 1994. The deduction increased to 30 percent for 1995. It also made it possible to take the deduction for any months in which the spouse was not eligible for coverage through an employer.
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Impact of HIPAA
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The Health Insurance Portability and Accountability Act (HIPAA) passed in 1996. Title III; subtitle B, of HIPAA established a schedule for incremental increases in the self-employed health insurance deduction. The deduction was 35 percent for 1998, 40 percent for 1999 through 2001, 45 percent for 2002 and 50 percent for 2003 and after. That schedule was amended a few years later and the deduction permanently increased to 100 percent in 2003.
2010 Health Care Reform
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The 2010 Health Care Reform provides no immediate benefit for the self-employed. There are some tax credits for small-business owners who employ at least two people---which would cover a partnership---but nothing for the sole proprietor. By 2014, self-employed persons should be able to purchase health insurance through state-based exchanges. If a person's income falls between 133 percent and 400 percent of the poverty level, subsidies will be offered.
A Final Step
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Advocates for the self-employed continue to fight for tax parity with small-business owners. The next step is for the IRS to declare health insurance premiums an ordinary and necessary expense for the self-employed. Payments would then be part of the Schedule C and excluded from self-employment tax.
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References
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