Deducting Health Insurance Premiums When You"re Self-Employed

If you have self-employment income, you can take a deduction for health insurance expenses incurred for yourself, your spouse, and your dependents.

Who Can Claim the Self-Employed Health Insurance Deduction

Self-employed people reporting income on Schedule F (for farmers) or Schedule C (other self-employed persons).
General partners in a partnership and actively participating members in an LLC treated as a partnership who have self-employed income.

Employees of an S-corporation who own 2% or more of the S-corporation's stock.

Types of Insurance that Qualify for the Deduction

The following types of insurance premiums can be deducted:

Any premiums for the self-employed person, that person's spouse and dependents, and adult children to age 27 even if they are no longer your dependents, can be deducted as part of the self-employed health insurance deduction.

Self-employed persons who pay supplemental Medicare premiums (such as for Part B coverage) can deduct those supplemental premiums as part of the self-employed health insurance deduction. (Source: CCA 201228037; see also: "Self-Employed Can Deduct Medicare Premiums, IRS Chief Counsel Advises," the Tax Advisor.)

Maximum Limit for the Self-Employed Health Insurance Deduction

Before claiming this tax deduction, you calculate your allowable health insurance deduction. Take your self-employment income, and subtract the 50% deduction for self-employment taxes, and subtract any retirement contributions made to SEP-IRA, SIMPLE-IRA, or Keogh plan.

The remainder is your allowable deduction for health insurance expenses.

Health Insurance Deduction in a Loss Year

If you are reporting a loss from your self-employed activity, then you are not eligible to deduct your health insurance costs since this particular deduction is limited by your self-employment income. You can however still claim the health insurance expenses as an itemized medical deduction on Schedule A.

Eligibility for Group Insurance Limits Your Deduction

You can deduct the full cost of health insurance you purchase for yourself, your spouse, and/or your dependents. However, you cannot deduct any insurance costs for any months you were eligible to participate in a subsidized group health insurance plan through your or your spouse's employer. For example, if you paid for 12 months of health insurance coverage for yourself and your family, but you became eligible to participate in your spouse's group health insurance in December, then you can deduct only 11 months worth of insurance premiums.

Where to Claim the Deduction

You claim the health insurance deduction as an adjustment to income on Form 1040. On the 2014 version of Form 1040, the self-employment health insurance deduction is located on Line 29. There's a worksheet provided in the Instructions for Form 1040 to calculate the deduction. There's a more detailed worksheet found in Publication 535. If a person obtained health insurance through a health insurance exchange and received premium assistance tax credits, then use Worksheet P found in Publication 974, Premium Tax Credit (pdf).

Any health insurance premiums that you cannot deduct directly on Form 1040, you can deduct as an itemized medical deduction on Schedule A. (That is, any health insurance costs in excess of the maximum limit or because the person has a loss year.)

How This Deduction Impacts the Federal Tax

The self-employed health insurance deduction reduces a person's adjusted gross income and federal income tax. The deduction does not reduce the self-employment tax.