Self-employed health insurance deduction 2015

By | January 18, 2015

Editor’s note:  This post was originally written in September 2013, but was updated in December 2014 to reflect changes that apply to 2015.

The last several years of economic uncertainty and high unemployment have inspired many people to become self employed, and the ACA has made that option easier to pursue.  For entrepreneurs who don’t have access to a spouse’s group health insurance plan, being self employed usually means purchasing a policy in the individual health insurance market.

And for those who are used to having an employer cover all or most of the premiums on a group plan, paying for an individual policy can induce a bit of sticker shock.  This was particularly true prior to 2014, when the self-employed had to pay the full premium for an individual policy.  But thanks to the ACA’s premium tax credits, many self-employed Americans are now getting help paying for their coverage.

In addition to the premium tax credits, there are other ways that the self-employed can save a few dollars when it comes to healthcare. One obvious place to look is on their tax forms, but one look isn’t enough: federal deductions for health insurance change regularly, so keep up with code changes.

For 2015, the self employed have several deductions and tax credits to utilize:

Deduction for self employed isn’t new

If you buy your own health insurance, you should definitely know about the long-standing health insurance premium deduction for the self-employed.

Congress implemented a 25 percent deduction on self-employed health insurance premiums in 1987 and made it permanent in 1994. The self-employed received even better news in 2003 when premiums became 100 percent deductible.

The deduction – which you’ll find on Form 1040, Line 29 – allows self-employed people to reduce their adjusted gross income by the amount they pay in health insurance premiums during a given year. You’ll find the deduction on your personal income tax form, and you can file for it if you were self-employed and showed a profit for the year.

If you’re also eligible for a premium tax credit (premium subsidy), there are two methods that the IRS will let you use to determine your deduction and your tax credit.

You can’t take the premium deduction if you were eligible for a group insurance from your or your spouse’s employer.

The ACA and more-than-2% S-corp shareholders

What IS new for 2014 is the impact that the ACA has on more-than-2-percent S-corp shareholders regarding their health insurance premiums.  We’re including this in the discussion because many self-employed people form S-corps with a spouse; although they consider themselves “self-employed,” in the eyes of the IRS, they are a business that includes two shareholders/employees.

In the past (since 2008), more-than-2% shareholders of an S-corp were allowed to buy individual health insurance in their own name, and then get reimbursed by the S-corp.  The premiums were included on the shareholder’s W2, and then the shareholder was allowed to deduct the premiums on the first page of the 1040, resulting in a lower AGI (see example 4 on page 4 of the IRS regulation from 2008).

But the ACA’s ban on employers reimbursing employees for individual health insurance premiums seems counter to this provision.  Although so far, it appears that the IRS has not directly addressed the issue of more-than-2-percent shareholders of an S-corp (and as clarification, Section 105 plans are widely being touted as a work-around for the ban on reimbursement of individual health insurance premiums – but employers who utilize them may be setting themselves up for substantial penalties, as it does not appear that the IRS considers the work-around to be within the letter of the law).

This explanation from the IRS (updated December 2014) indicates that someone who is the sole shareholder in an S-corp may continue to be reimbursed from the S-corp for individual health insurance.  But when there are multiple shareholders, it’s probably wise for now to err on the side of caution and not get reimbursed by the S-corp if the shareholders are covered by individual (ie, non-group) health insurance.

HSAs allow insureds to pay for medical expenses with pre-tax dollars

Although being self employed means that there’s no employer footing the bill for health insurance, it also gives entrepreneurs a lot of flexibility in terms of what type of health insurance they purchase. One popular option is an HSA-qualified high deductible health plan (HDHP).

Coverage under an HDHP makes the insured eligible to open an HSA and make pre-tax contributions that can be used later to pay for medical expenses. In 2014, the contribution limits are $3,300 for a single individual and $6,550 for a family.  For 2015, the contribution limits are increasing to $3,350 for an individual and $6,650 for a family.

The contribution is deducted “above the line” on the 1040, which means it’s available to filers regardless of whether they itemize deductions. And although the money can be withdrawn without penalties or taxes to pay for qualified medical expenses, some insureds choose to treat their HSAs as secondary retirement accounts, with tax implications similar to traditional IRAs:  contributions are tax deductible and distributions during retirement are taxed as income.

ACA tax credits make individual health insurance more affordable

Thanks to the ACA, federal tax credits (subsidies) – obtained via the exchanges – are helping many families subsidize the purchase of individual health insurance.  The tax credits are great for the self-employed, who have traditionally had to foot the entire bill for their health insurance.  Employees who get employer-sponsored health insurance typically enjoy a substantial subsidy in the form of employer contribution to the premium, and the ACA makes similar subsidies available for many self-employed people.

The tax credits are available to households with incomes under 400 percent of the federal poverty level (FPL), as long as the enrollees do not have access to employer-sponsored health insurance that is considered affordable.  For the 2015 open enrollment period and for plans obtained later in 2015 due to qualifying events, the 2014 poverty level is used, and the upper annual income threshold for subsidy eligibility is $46,680 for a single individual and $111,640 for a family of five.

The subsidies can be paid directly to health insurance carriers on a monthly basis to reduce the amount that insureds have to pay for their coverage.  And the relatively high income limits mean that they’re widely available: of the 8 million people who enrolled in private health plans through the exchanges during the 2014 open enrollment period, 85 percent qualified for premium tax credits.  For those enrollees, premiums were an average of 76 percent lower than the retail rates because of the subsidies.

For eligible self-employed people, the tax credits make individual health insurance significantly more affordable than it would otherwise be.  And since the ACA also did away with medical underwriting in the individual health insurance market,  people who avoided entrepreneurship in the past because of pre-existing health conditions can now become self-employed without having to worry about being ineligible to purchase health insurance.

One last write-off to consider

If you face high medical bills and itemize your deductions, you might be able to deduct some of your medical expenses.  The deduction – found on Schedule A of your income tax return – covers a wide range of medical expenses, and also includes premiums you pay for health insurance or qualified long-term care.  You can’t double deduct though – if you deduct your health insurance premiums under the self-employed health insurance deduction explained above, you can’t include them in your medical expenses.

And you can only deduct expenses in excess of 10 percent of your adjusted gross. The threshold used to be 7.5 percent (through 2012), and for filers who are at least 65 years old, medical expenses that exceed 7.5 percent of adjusted gross income can still be deducted through the end of 2016.

But starting in 2017, all filers will be limited to deducting only medical expenses that are in excess of 10 percent of their AGI, which can be a hard target to hit unless you’re dealing with a significant illness or injury.

Still, it’s one more good reason to keep track of your medical bills – just in case.

Leave a Reply