Many freelancers wonder if they can deduct their health insurance premiums. Employees, by contrast, often have their health insurance premiums taken out of their paycheck pre-tax. For freelancers, the answer is they too can get the tax benefit of their health insurance costs that they pay for themselves, their spouse, and dependents, but the steps to do so are a little more complicated since it must be taken as a deduction come tax filing time.
The Benefit of Deducting Health Insurance
By deducting health insurance premiums, freelancers can reduce their federal and state income tax. (This deduction does not reduce a person’s self-employment tax for the year, however.)
Besides the tax deduction, having health insurance also helps avoid the individual shared responsibility payment. This is the tax penalty imposed under the Affordable Care Act if a person is not covered by health insurance for the whole year.
Eligibility for the Deduction
To be eligible for the deduction, a person needs to be self-employed and earning a net profit on their self-employment income.
What to Watch out for
Additionally, freelancers cannot take a deduction for any month they were eligible to participate in an employer’s subsidized health plan, even if they choose not to participate in the plan.
For example, John is a freelance graphic designer and paid for 12 months of health insurance for himself. John could have been covered under a group health plan through his spouse’s employment starting November 1. John declined to participate in his spouse’s group health plan. Since John was eligible to participate in an employer’s health plan, even though he declined coverage, John will be eligible to deduct only 10 months of his health insurance premiums. The premiums he paid for November and December are not deductible as part of the self-employed health insurance deduction.
What Can Be Deducted
Freelancers can deduct premiums paid for the following types of insurance policies:
- Medical insurance,
- Dental insurance, and
- Qualified long-term care insurance.
Freelancers can deduct premiums paid for themselves, their spouse, and their dependents.
Freelancers also can deduct premiums paid on insurance policies for their children who were age 26 or younger at the end of the year, even if the freelancer can no longer claim the child as a dependent.
Limitations on the Health Insurance Deduction
The amount of the self-employed health insurance deduction is limited. The deduction cannot exceed the net profit from a freelancer’s self-employment income for the year.
Records Needed to Document the Deduction
Freelancers should keep documents to prove they paid premiums for health, dental and qualified long-term care insurance. This would include billing statements and bank statements.
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