Deducting Health Insurance Premiums
Health insurance premium are deductible for every taxpayer. However, there are a lot of limitations on how they are deducted.
If you are an employee who receives your wages on a W2, you can deduct your health insurance premiums in your itemized deductions along with all your medical and dental expenses. However, you can only deduct medical costs that are over 10% of your income for the year. In prior years, if you were over age 65, you could deduct health costs that were over 7.5% of your income but that is no longer true for tax year 2016 and moving forward. This means the deduction is of limited value in most years but if there are catastrophic issues or a loss of a job, it can mean large tax savings.
Self-employed business owners who report income on a Schedule C can take a self-employed health insurance deduction that not subject to the 10% limit. However, they can only take the deduction to the extent that there was earned income from their Schedule C businesses. For example, if you paid $15,000 for health insurance for the 2016 tax year but only had $10,000 in profits from your business, you can only deduct $10,000 as self-employed health insurance costs.
LLC members have similar rules to the Schedule C filers. However, it is important to note that the income must be earned income. This means that profits from rental real estate or passive activities will not allow these members to take the self-employed health insurance deduction. Basically unless you are paying self-employment taxes, you are not allowed to take the self-employed health insurance. Health insurance costs for members will never be taken by the LLC.
S-Corps have very special rules about health insurance. If you are a more than 2% owner of an S-Corp and the S-Corp pays for your health insurance, the S-Corp can take the deduction. However, the cost of this health insurance must be added to your W2 and it is then deducted as a self-employed health insurance deduction. This means that the health insurance lowers corporate net profits but does not affect the individual tax return with a deduction. If there is not health insurance included in your W2, you will not able to deduct the cost of health insurance on your S-Corp and you will be subject to the 10% limitation for personal health insurance deduction.
S-Corp owners must absolutely speak with their payroll companies to make sure their health insurance premiums are reflected on their W2s or they will lose out on all or most of the benefit of this deduction. We strongly recommend that this be done before year end to ensure that W2s will not need corrections.