Home Business Taxes: Deducting Health Insurance Costs

If you have self-employed health insurance, you should probably be deducting it when you prepare your home business taxes.

Hopefully, as April approaches, you have been organizing your home business taxes. (Bonus points if you’re done, and if you’ve already filed.)

Hopefully, if you pay for your own health insurance, you are taking the tax deduction allowed for those who are self-employed. One of the things that helps me with my home business is the fact that we can deduct up to 100% of our health insurance premiums.

Who Can Deduct Health Insurance Costs on Their Home Business Taxes?

As always, the IRS has its eligibility requirements. If you want to deduct your self-employed health insurance premiums, you need to be truly self-employed, and purchasing the health insurance through your own means, rather than through an outside employer:

• Report income on Schedule F or Schedule C
• General partners in a partnership and active members of an LLC treated as a partnership who have self-employed income (this is me)
• S-Corp. employees who own 2% or more of the stock in the S-Corp.

You can deduct your medical insurance, dental insurance, and long-term care insurance premiums from your income. Additionally, you can deduct premiums for your spouse and dependents — as well as adult children up to age 27.

How Much Can You Deduct from Your Home Business Taxes?

It’s important to understand that there are limits to your health insurance premium tax deduction. First of all, you are limited by the income from your home business, so if you report a loss, you can’t fully deduct your premiums (although you can still get a deduction via Schedule A if they amount to at least 10% of your AGI).

As you figure your health insurance deduction, you first subtract your 50% deduction for self-employment taxes. Then you subtract your retirement contributions to SIMPLE IRAs, SEP IRAs, and Keogh plans. What’s left over can be used as a deduction for health insurance costs.

Make sure you are clear in record-keeping. If you are eligible to participate in an employer-subsidized plan (through your own employer or your spouse’s employer), you cannot deduct for the months you are eligible. So, if you are eligible for coverage through your spouse’s employer, and you instead choose individual insurance, you can’t deduct your premiums. Or, if you were eligible for subsidized insurance six months in, you can deduct your health insurance premiums for six months, but the rest of the year you can’t.

If you aren’t sure, you can consult with a knowledgeable accountant about your options and eligibility. You can also visit the IRS web site for more information.