Can You Deduct Health Insurance Premiums?
To stay afloat in this turbulent economy, small business owners strive to save money in every possible way -- especially at tax time. For over 20 years, they've been able to deduct family health insurance costs on Form 1040. In 2010, a new law allowed them to write off the same amount again on Schedule SE to boost their savings. Passed as a one-time deduction, legislation is underway to extend it into the 2011 tax year.
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Form 1040 Deduction
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In 1987, Congress implemented a 25 percent deduction for self-employed health insurance premiums -- renewing it each year through 1994 when the write-off became permanent. Small employers rejoiced in 2003 when it was raised to 100 percent.
This long-standing deduction allows self-employed individuals and small business owners to reduce adjusted gross income by the total amount paid for health insurance premiums -- by entering it on line 29 of Form 1040.
New Schedule SE Deduction
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Under the current tax code, corporations can deduct their total health insurance premiums as a business expense, thereby avoiding payroll (FICA) taxes on those costs. Through 2009, this left small employers at a disadvantage since they were not entitled to a similar business deduction, in addition to the burden of paying higher premiums due to covering fewer people.
To help even out this disparity during the economic downturn, Congress passed the Small Business Jobs Act (SBJA) in September 2010 -- resulting in a one-time deduction for the 2010 tax year. Under the SBJA provisions, small employers can reduce their total self-employment income by deducting 100 percent of their 2010 health insurance costs a second time -- when filing Schedule SE. On line 3 of Schedule SE - Section B, subtract the amount entered on line 29 of Form 1040.
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Qualifications
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You can claim the self-employed health insurance deduction if your insurance plan is established under your business name (or your name, if a sole proprietor) and if you meet either of the two IRS key criteria: 1) self-employed with a net profit for the tax year or 2) received wages from an S corporation in which you were a shareholder of more than 2 percent.
In addition, you must not be eligible for group coverage under your employer's health plan (if you're also employed while running your business) or through your spouse's employer.
Amended Return
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If you were unaware of this new deduction and already filed your Schedule SE for 2010, consider filing an amended return. According to the Internal Revenue Service (IRS) website, taxpayers may do so "if your filing status, your income, your deductions or credits are incorrect." Complete instructions on how to file an amended return are available on the IRS.gov website.
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