In-Depth Articles
Tax Break for the Self-Employed:
How to Make the Most of Your 2010 Health Insurance Premiums
On September 27, 2010, the Small Business Jobs Act was signed into law in an attempt to stimulate the creation of jobs in the small business sector. Among a variety of provisions aimed at assisting small businesses, the legislation includes a one-time tax break specifically designed to provide relief for the self-employed.
For 2010 a self-employed individual will be permitted to deduct the costs incurred for individual and family health insurance premiums when computing their income from self-employment. This additional deduction against self-employment income will allow these individuals to enjoy a significant tax savings based on the cost of their health insurance premiums. Prior to 2010 the health insurance deduction was taken into account after computing self-employment tax on business income. Currently this change has been enacted for 2010 only.
Qualifying Factors
Self-employed taxpayers include those individuals engaged in an active trade or business either as a sole proprietor, partner in an active partnership, or an active LLC member. Such individuals are subject to a 15.3% tax on net earnings from self-employment. The self-employment income, along with a deduction equal to one-half of the self-employment tax, is included with the taxpayer’s other income and loss items in the calculation of their taxable income.
For an insurance plan to qualify for the self-employed health insurance deduction, it must be established under the taxpayer’s business. The insurance policy, however, may be in the name of the taxpayer or the business depending on certain circumstances.
Qualified health insurance premiums include amounts paid to cover spouses, dependents, and certain children under age 27. For children under age 27, only premiums paid or after March 30, 2010 on behalf of a child that is not otherwise eligible for coverage will be considered qualified for the deduction. Additionally, self-employed individuals may not claim a deduction for costs of premiums if they would be otherwise covered under a plan of their dependent or child under age 27. Certain long-term care premiums may also be considered for this deduction depending on the taxpayer’s age. As with prior years, any self-employed health insurance premium deducted cannot be taken as a medical expense in computing itemized deductions.
It is important to remember that this is a deduction from self-employment income. It will only provide a tax benefit to the extent that there is net income and self-employment tax from the activity to offset.
Changes for S-Corp Shareholders
There are already existing reporting regulations governing the treatment of health insurance premiums paid on behalf of more-than-two-percent shareholders of an S corporation. This new legislation does not impact these regulations.
Overall, the expanded self-employed health insurance deduction may equate to some substantial tax saving for self-employed individuals in 2010. Please contact us to discuss how this provision may apply to your situation.
To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used for the purpose of avoiding penalties assessed under the Internal Revenue Code.
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