Understanding the self-employed health insurance deduction

Self-employment can be freeing in many ways, but it also comes with additional burdens such as mandatory quarterly estimated tax filings and having to pay for your own health insurance. But there is a pleasant surprise when tax season rolls around: the self-employed health insurance deduction. So what is it and what deductions are available? Understanding this self-employed health insurance deduction can save you a significant amount of money every year.

What is the self-employed health insurance deduction?

The self-employed health insurance deduction is a tax deduction that covers medical, dental, and long-term care insurance premiums for those who are self-employed. The same types of premiums for their spouses, dependents, and any non-dependent children under the age of 27 can also be deducted.

Why is the self-employed health insurance deduction beneficial?

Unlike many tax deductions, you can get the self-employed health insurance deduction regardless of whether you take a standard or itemized deduction. It is known as an "above-the-line deduction” and reduces your adjusted gross income (AGI).

If you qualify, you can deduct 100 percent of your health and dental premiums. You can also deduct qualifying long-term care insurance premiums; the maximum amount depends on your age and changes annually by the IRS. This self-employed health insurance deduction applies to federal, state, and local income taxes but does not apply to your self-employment taxes.

Here are some other things you should know about health insurance and your taxes. Want an even bigger tax refund? Get our quick guide to common deductions for the self-employed to see what else you can deduct.

How do I qualify for the self-employed health insurance deduction?

You can qualify for the self-employed health insurance deduction if you are self-employed and not eligible for any other health insurance plan. So if you have another job that offers you health insurance or your spouse's employer can cover you, you won't be able to take this deduction, even if you didn’t enroll in the other insurance plan. Eligibility is month-by-month, so you can only claim the deduction for the months when you qualify. This deduction and the eligibility rules also apply to those who are partners or LLC members.

In addition, you can't deduct more than what you earn from your business during that tax year. If your premiums were more than your income, you can claim up to the income amount as your self-employed health insurance deduction, and you may be able to claim the excess as medical expenses in your Schedule A. If you had a tax loss for the year, you won’t be able to claim this deduction.

Am I eligible for the self-employed health insurance deduction if I have COBRA?

If you chose to take COBRA health insurance after leaving a previous job, you may be able to deduct any premiums paid out-of-pocket. However, you are not eligible for the self-employed insurance deduction as the plan is still under your former employer’s name. Instead, you can claim the premiums as medical expenses in Schedule A if they exceed 7.5 percent of your AGI. (The 7.5 percent number is valid in the 2017 and 2018 tax years; it is 10 percent starting in 2019). Keep in mind though that this deduction is only available if you itemize your deductions and may only be valuable if your total itemized deductions are higher than the standard deduction.

What is the premium tax credit?

The premium tax credit is one of the subsidies available under the Affordable Care Act. This tax credit helps lower your monthly health insurance premium. You can choose to use the tax credit in advance and lower your premium each month. Or you can leave it be and receive a refundable credit when you file your taxes. If your income ends up exceeding the amount allowed and you had advanced tax credits applied, you will have to pay back those advanced tax credits come Tax Day.

You’ll typically qualify for the premium tax credit if you make between 100-400% of the federal poverty level for your household size. Use this flowchart from the IRS to see if you qualify. Only health insurance plans bought through health insurance Marketplaces and websites linked to the Marketplace such as HealthSherpa are eligible for this premium tax credit. You can apply the premium tax credit to any bronze, silver, gold, or platinum plan on the Marketplace. However, it does not work on catastrophic plans.

What should I do if I’m eligible for both the self-employed health insurance deduction and the premium tax credit?

The key rule of applying both the self-employed health insurance deduction and the premium tax credit is that you can’t double dip. That is, the combined amount of deductions and credits cannot be greater than the total of your eligible premiums.

How exactly you claim this deduction can be complicated though, whether or not you also claim the premium tax credit. So please talk with a certified tax professional to make sure you’re clear on the limitations and restrictions.

The use of this article should only be for informational purposes and does not constitute tax advice. Tax codes and deductions can change each year so it's important to reach out to a certified tax professional. That way you can find out if you qualify for the self-employed health insurance deduction.