Can I Deduct Short Term Health Insurance from My Taxes If I’m Self-Employed?
When you pay your monthly health insurance premium, it may feel like you’ll never see that money again. But if you’re self-employed, you just might. When you file your taxes, you may be able to claim your short term health insurance premium as an adjustment to gross income.
The IRS allows taxpayers in certain situations to count their healthcare expenses as a tax deduction. People who have insurance through their jobs can deduct medical expenses only if their spending passes a certain threshold. As a self-employed person, different rules apply to you. You may qualify to deduct all of your health insurance premiums without first having to meet a certain level of healthcare spending.
For self-employed people, health insurance premiums are considered an “above-the-line” deduction. That means that this deduction lowers the total amount of your adjusted gross income, so you have less income that’s considered taxable. Because this benefit is an above-the-line adjustment, you don’t have to itemize deductions in order to take advantage of it.
What Counts as Medical Insurance
The IRS specifies that three types of insurance count for this deduction. You can take into account the premiums that you pay for medical insurance, dental insurance and long-term care insurance. In other words, you can use this benefit with more than just major medical policies.
When describing medical insurance policies, the IRS explains that they may cover “hospitalization, surgical services, X-rays.” These are the types of services that are covered by most short term health insurance plans, which means that temporary health plans should qualify as a tax-deductible expense for self-employed people.
If your short term health plan provides more limited coverage – for example, it doesn’t cover X-ray services – that doesn’t necessarily rule out your premiums as a deductible expense. The IRS doesn’t insist that a plan must cover all of the outlined services in order to qualify as medical insurance for tax purposes. These services are simply provided as examples to help taxpayers understand what medical insurance is.
Although the IRS rules don’t specifically exclude short term health insurance as a deductible expense, neither do they expressly include short term health plans. If you have questions about whether your health coverage counts as a deductible expense, consult a tax professional who specializes in matters related to self-employment.
Qualifications for the Self-Employment Tax Benefit
Before you deduct your premium costs, it’s a good idea to make sure that you qualify for this deduction. Not every independent contractor or small business owner can claim it.
No Other Insurance
The IRS won’t let you deduct the cost of individual health insurance if you could have participated in a group plan instead. For example, you might have a full-time job in addition to running your own business. If you qualify for health insurance through that job, you won’t qualify for a deduction of your individual health insurance premiums. Likewise, if you could get insurance through your spouse’s employer, then this deduction is not for you.
Your eligibility is calculated on a month-by-month basis. Having access to group insurance for part of the year won’t stop you from taking the deduction for the months when a private plan was your only option.
In order to qualify for this deduction, your self-employment must produce income. If your small business hasn’t yet generated a profit, then you won’t be able to take the deduction this year.
Additionally, if your premiums are greater than your profit, you can’t count the full health insurance price as an adjustment to your gross income. The above-the-line deduction is limited to an amount that is less than or equal to your profit for the year. The excess may be deductible as an itemized expense, however.
Correct Business Structure
If you’re the only person involved in your self-employment setup, taking this deduction is pretty easy. You can buy your insurance policy in your name or in the name of your business. Either approach allows you to deduct your premiums.
If you have a partnership or an S-corporation, you can still set up your health plan in either name. But if it’s set up in your name, you have to pay the premiums yourself, and the business must reimburse you. The reimbursement must be counted as income, so the amount should be noted on your Schedule K-1 or W-2 form.
Taxed Dollars Only
In some cases, your health insurance premiums may be paid with pre-tax dollars. In that case, you’ve already gotten out of paying taxes on that money. You can’t list the premium costs as an additional deduction. To qualify for the adjustment to income, you must pay the insurance premiums with post-tax dollars.
What You Can’t Deduct
Although being able to deduct the cost of your premiums is a significant benefit, there are some expenses related to health insurance that you aren’t allowed to deduct. Before filing your taxes, make sure you understand what you can and cannot deduct.
The individual mandate penalty of the Affordable Care Act remains in effect for 2018. If you don’t have a health plan that meets the ACA’s standards for minimum essential coverage, you may owe this fine to the government. Short term health insurance doesn’t qualify as ACA-compliant coverage, so you may have to pay the fee if you choose a temporary plan instead of a major medical plan for three or more consecutive months. The amount that you pay for this penalty cannot be counted as a deduction.
You also can’t deduct health insurance that’s combined with other insurance policies unless the insurer provides clear information about what portion of the premium covers medical care. A common example of this is auto insurance that includes coverage for hospital care after an accident. You might also face this situation if you purchase a short term travel insurance plan for your vacation. Unless your policy clearly indicates how much the medical portion of the plan costs, you can’t count these policies as a deduction.
If you choose to get health insurance through the marketplace instead of buying a temporary health plan, there’s one other thing that you should know. The portion of your premium that is paid by subsidies isn’t tax-deductible. You can only count the amount that you actually paid out of your own pocket with post-tax dollars.
Although determining what counts as a health insurance deduction might seem complicated, it’s worth the effort. As a self-employed person, being able to deduct the cost of your premiums from your adjusted gross income is one of the best ways to reclaim some of the money that you’ve put into healthcare benefits. To make the most of this advantage, remember that you aren’t limited to taking a deduction only for major medical premiums. You may also be able to claim other insurance expenses, including the cost of a temporary health insurance plan. As always, if you have any questions about deductions related to healthcare and self-employment, consult a qualified tax professional for advice that’s specific to your situation.