Big Break for Self-Employed Health Insurance Deduction
Background - A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) can deduct as an above-the-line expense 100% of the amount paid during the tax year for medical insurance on behalf of himself, his spouse, his dependents and his children under the age of 27 even if the children don’t qualify as tax dependents, subject to the following requirements (Code Sec. 162(l)(1)(B)):
- The deduction cannot exceed the individual’s net earnings from self-employment derived from the trade or business for which the plan providing the coverage is established.
- For a more-than-2% S corporation shareholder, that shareholder's wages from the S corporation are treated as his earned income.
- No individual who is eligible to participate in any subsidized health plan maintained by any employer of the individual or of the individual's spouse is entitled to the deduction. This test for eligibility is made for each calendar month and applied separately to long-term care insurance.
- child,
- stepchild,
- legally-adopted individual,
- an individual lawfully placed with the employee for legal adoption, and
- an eligible foster child.
No other requirements apply so long as the individual meets the definition of a child and has not reached age 27 by the last day of the year. Even a married child is included by this definition! (But the married child’s spouse and/or children are not covered.) A child attains age 27 on the 27th anniversary of the date the child was born (for example, a child born on April 10, 1989 attained age 27 on April 10, 2016).
If the self-employed individual utilizes a group policy provided by an association, be aware that although group policies offered by insurers are also required to cover older children, they are only required for children under the age of 26.
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