The self-employed premium deduction
If you had a net profit from self-employment, you can generally deduct health insurance premiums for yourself, your spouse, and your dependents. The IRS explains the rules in its Form 7206 instructions. You cannot count any month in which you could have joined a subsidized employer plan, including a spouse's, even if you did not join.
Sam to confirm: review and sign off on this guide
Who qualifies
The IRS instructions for Form 7206 say one of these must be true:
- You were self-employed with a net profit on Schedule C or Schedule F.
- You were a partner with net earnings from self-employment on Schedule K-1.
- You used an optional method to figure net earnings on Schedule SE.
- You received wages from an S corporation in which you were a more-than-2% shareholder, with the premiums shown as wages on your W-2.
Who it can cover
You, your spouse, and your dependents. It can also cover your child who was under age 27 at the end of the tax year, even if that child was not your dependent.
The months that do not count
This is the trap. You cannot take the deduction for any month you were eligible to join a health plan subsidized by your employer or your spouse's employer, at any time during that month, even if you did not actually join. The same goes for a plan from the employer of your dependent or your child under 27.
So if you are self-employed and your spouse could join a subsidized plan at work, the deduction may not be available, even if you buy your own coverage.
A worked example
Say a sole proprietor pays $800 a month, or $9,600 a year, with enough net profit to deduct all of it and no employer plan available. In a 22% federal income tax bracket, the deduction would cut federal income tax by about $2,112, for an after-tax cost of about $7,488.
The premium and tax bracket are assumed for illustration. Your result depends on your income, state, and return. Ask a tax professional.
S corporation owners
For a more-than-2% shareholder, the policy can be in the corporation's name or yours. Either the corporation pays the premiums, or you pay and the corporation reimburses you. Either way, the amount goes on your W-2 as wages. If the policy is in your name and the corporation does not reimburse and report it, the IRS says the plan is not considered established under your business.
Marketplace plans and the tax credit
If your plan came through the Marketplace and you received or are claiming a premium tax credit, the two calculations interact. The IRS sends you to Publication 974 for this. It is a good moment to use a tax professional.
Whether a non-Marketplace plan's premium qualifies is a question for your tax professional. Bring the plan documents, not the brochure.