The average American spends around $5,000 on healthcare. One of the main drivers of healthcare costs has been insurance. In fact, insurance costs make up more than three-fifths of average healthcare spending.
It’s clear health insurance is a big expenditure, whether you’re single or have a family. If you’re a freelancer or entrepreneur, you’re also shouldering the cost all by yourself.
Is health insurance tax deductible if you’re self-employed? The answer might surprise you.
Health Insurance Tax Deductible for Self-Employed
The short answer is yes, health insurance is tax-deductible if you’re self-employed.
It only makes sense. When someone works for a company, they often get help with the costs of their health insurance. As a self-employed person, you’re taking on the costs by yourself, since you’re both employer and employee.
That’s why there’s a health insurance deduction for self-employed people. There are a few restrictions, though, so you’ll want to be sure you know the rules before you buy a health insurance plan.
Spousal Coverage Limits Deduction
One of the limitations is if you or your spouse were eligible for coverage elsewhere. If you have an employer-sponsored healthcare insurance plan, you can’t deduct premiums. If your spouse has coverage at work, you can’t claim self-employed health insurance.
This means many self-employed Americans can’t claim health insurance deductions. Either their spouse is eligible for coverage, or they have coverage through a regular “day job.” Many self-employed Americans operate their businesses on the side, which limits deductions.
Your eligibility is also determined by month. If you have employer-sponsored coverage from January until June, you can’t claim the full year. You’ll only be able to claim premiums paid from July to December.
The same is true if your spouse becomes eligible for insurance. If they take a new job and become eligible for coverage in December, you can only claim premiums for 11 months.
Keep in mind that the deduction doesn’t only consider whether you have coverage. It considers whether you’re eligible for an employer-sponsored plan. If you decline that coverage, you can’t then claim the deduction.
How Much Can You Claim?
Another limitation on the self-employed health insurance deduction is how much you can claim. Your health insurance deduction can’t be more than your self-employed income.
Suppose you paid $3,400 in health insurance premiums. You only made $2,500 through your business, so you wouldn’t be able to claim the entire amount you paid for health insurance.
If you report a business loss, you can’t claim a deduction at all.
Claiming Above the Line
As a self-employed person, you do have a few choices about how you handle your deductions. You can choose to claim premiums “above the line,” or to claim them as medical expenses.
It’s usually better for self-employed people to claim health insurance “above the line.” That means the total comes off your reported business income, less other expenses. Keep in mind that your taxes are calculated on that figure, not your income less health insurance premiums.
If you can’t claim self-employed health insurance deductions, you may claim premiums as medical expenses. This doesn’t usually give you as big a break, so it’s better to claim above the line when you can.
You also have a choice of whether to itemize or claim the standard deduction. The standard deduction is usually the higher of the two, which makes it the better choice. If you itemize, you can still claim any premiums you couldn’t deduct as a medical expense.
What Plans Are Eligible?
This is a key question for self-employed people. Which health insurance plans can you write off?
Fortunately, there aren’t too many limitations when it comes to choosing a plan. Your health insurance write off can be used for:
- Premiums paid for coverage for you, your spouse, and your dependents
- Dental care coverage
- Long-term care coverage
- Insurance plans for children and adults, until the age of 26
Adults must be aged 25 at the end of the year to be eligible. If they turn 26 during the course of the year, you can’t write off the premiums for their plan.
So long as your premiums don’t exceed your business income, you can write off health insurance plan costs. The same is true if you don’t have coverage through an employer-sponsored program.
Choosing a Plan as a Self-Employed Person
Now you know about the health insurance deduction. You’re probably wondering what plans are available for self-employed people.
Luckily, there are many options for self-employed health insurance. You’ll want to take some time to do research. Compare and contrast plans, and ask providers plenty of questions before you sign up for a plan.
One good step to take is to assess your health insurance needs. If you’re a young, single person, your health insurance needs are probably minimal. If you have a young family or a sick or elderly relative, your needs will change dramatically.
Shopping around for insurance to cover your needs is always wise. A plan may seem affordable, but it may not offer you what you need. The wrong plan could leave you paying out of pocket for many medical expenses.
The best health insurance will help you avoid those out of pocket costs. You may want to consider health insurance plans available through a professional association. Short-term health insurance may also be a good choice for basic medical coverage.
Stake Your Claims
Making health insurance tax deductible has been a huge help for millions of self-employed Americans. If you think you might be eligible to claim the deduction, talk to your bookkeeper or tax accountant today.
With tax season right around the corner, you may be looking for more information on deductions and other tax tips. Check out our library for tips on pensions and so much more.