Self-employed individuals may take above-the-line deductions (generally limited to the net earnings from self-employment) for the amount paid during the tax year for medical insurance for the individuals, their spouses, their dependents and their children under the age of 27.
Self-employed individuals qualifying for the above-the-line deduction can include general partners or limited partners who receive guaranteed payments (Rev Rul 91-26, 1991-1 CB 184) as well as S-Corporation shareholders who hold more than 2%; the shareholder’s wages from the S-corporation are treated as earned income.
When adding the amounts that qualify as insurance premiums for either the self-employed health deduction or the Schedule A deduction, don’t overlook:
- Long-term care Insurance premiums (up to the age-based maximum)
- ACA marketplace premiums net of the advance premium tax credit (APTC)
- Payback of any portions of the APTC in the year of the APTC
- Employee costs for employer group coverage
- Medicare parts B, C and D premiums
- Medicare supplemental plan premiums
- Dental insurance premiums
- Vision insurance premiums
- Lost or damaged contact lens premiums
If the taxpayer is self-employed and the premiums cannot be used for the above-the-line self-employed health insurance deduction because of the net SE earnings limitation, the excess can be taken as a Schedule A deduction.
Medical expenses paid by an HRA or FSA are not deductible health insurance premiums because they are paid for by pretax dollars. The same goes for medical expenses paid for or reimbursed by an HSA.
No above-the-line self-employed-deduction is available for any month in which the self-employed individual is eligible to participate in a subsidized* health plan maintained by the taxpayer’s employer, the taxpayer’s spouse, or any dependent or child who hasn’t attained age 27 as of the end of the tax year. This rule is applied separately to (1) plans that provide coverage for qualified long-term care services or that are qualified long-term care insurance contracts and (2) plans that don’t include such coverage and aren’t such contracts (Code Sec. 162(l)(2)(B)). Thus, an individual eligible for employer-subsidized health insurance may still be able to deduct long-term care insurance premiums as long as that person isn’t eligible for employer-subsidized long-term care insurance.
* The term “subsidized” means that at least 50% of the cost of the coverage is paid by the employer (Sec 35(f)(1)).