How to Claim Your Self-Employed Health Insurance Deduction
The United States is first in many things. Unfortunately, that includes having the most expensive healthcare system in the world.
In a country where a minor operation can saddle you with medical debt for years, and health insurance prices are through the roof, many freelancers and independent contractors have a “knock on wood” approach to their health.
What many don’t realize, however, is that their health insurance premiums can lower their bill at tax time.
What is the self-employed health insurance deduction?
By law, many businesses are required to provide health insurance to their employees, and they can write off the associated cost. That makes health insurance a business expense.
This write-off works a little differently for self-employed folks — more on that later. Still, it is still a legitimate business expense. Even better, it can extend to more than just your own coverage.
That’s right! You’re allowed to claim health insurance for:
- Your spouse
- Children under the age of 27 (even if they aren’t a dependent for tax purposes)
Surprised by the last one? Most people are! Even if you can’t claim your children on your taxes, their health insurance costs can be used to lower your taxable income.
Is health insurance deductible on Schedule C?
Unfortunately, no. Your Schedule C has a line item for “insurance,” which understandably confuses people. But that line is reserved for things like business liability insurance, not your personal health insurance.
Your health insurance can’t be written off on your Schedule C. That means it can’t be used to directly lower your business income.
The health insurance deduction only reduces your overall income and, by extension, your income taxes. It can’t reduce your self-employment taxes.
The only way to lower your self-employment taxes is to claim your business write-offs. This is why I always encourage freelancers to try out the Keeper App, which automatically sifts through their bank and credit card statements to find every eligible deduction.
So if your premiums can’t be claimed on your Schedule C, how does the health insurance deduction actually work?
Claiming your health insurance income adjustment
“Self-employed health insurance income adjustment” is a mouthful, so let’s break it down.
First things first, what is an income adjustment?
Write-offs vs. adjustments
I know there are a lot of different terms being tossed around, like “deduction,” “write-off,” and now “adjustment.” To tax professionals like myself, these all refer to different things. In casual conversation, however, we tend to use them interchangeably because they essentially all do the same thing: lower your income.
Just to help distinguish between them, “deductions” and “write-offs” refer to anything that lowers your business income or your regular income.
“Adjustments,” on the other hand, only lower your regular income: they have no effect on your business taxes.
In other words, income adjustments lower your “taxable income” dollar for dollar, which ultimately means you’ll pay less income tax.
Other examples of income adjustments include:
- 👵 Retirement contributions
- 🏥 HSA contributions
- 🎓 Student loan interest payments
- 🍎 Educator expenses
Income adjustments pack a punch for two reasons:
- They help you avoid higher tax brackets, and
- They help you avoid income phaseouts for valuable tax credits
To give an example: Let’s say you made $85,000 of self-employment income last year, putting you just barely into the 22% tax bracket. During the year, you spent $7,000 on health insurance, and went to school part-time.
Being in school makes you potentially eligible for certain tax credits, depending on your taxable income. One huge one is the American Opportunity Tax Credit, available for the first four years of postsecondary school.
This credit phases out at $80,000 for single taxpayers. Normally, you’d be out of luck. But subtracting $7,000 for your health insurance, your adjusted gross income becomes $78,000. That means you avoid the phaseout and unlock a $2,500 tax credit. You also safely avoid the 22% tax bracket.
When can you claim the health insurance deduction?
Unfortunately, not all self-employed people can use their health insurance to lower their taxes. Much like the home office deduction, you can only claim this write-off to the extent that you have business income. That is, your deduction can never be more than your income after expenses.
To give an example, let’s say you paid $7,000 in health insurance last year. After calculating all your other business write-offs, your net income is $5,000. That means you'll only be able to take a $5,000 income adjustment for your health insurance.
Note that, if your other business write-offs bring your net income to zero, you won’t be able to claim anything. This is also true if you have a loss.
What happens if you have multiple freelance jobs?
Unfortunately, having multiple Schedule Cs doesn’t mean you can combine their net income to increase your insurance write-off. The IRS forces you to assign each type of insurance to one particular job or “activity.” (You can assign different types of insurance to different activities, allowing for some degree of mixing and matching. More on this below!)
So even if you had an additional $2,000 in net income from another activity, you’d still be limited to the $5,000 from the activity the insurance was assigned to.
What kind of insurance can you claim?
Many people are surprised to learn just how expansive the health insurance deduction is, but it does come with some limit. The best place to start is to understand what does qualify to be claimed.
What kind of coverage counts
Believe it or not, the self-employed health insurance deduction isn’t limited to health insurance plans. You can include premiums for all of the following types of coverage:
- 🤒 Health
- 🦷 Dental
- 👀 Vision
- 👴 Long-term care (more on this below)
Not bad, right? Looks like that root canal is back on the table.
What kind of coverage doesn’t count
Unfortunately, it matters where the insurance is coming from, and a few sources are explicitly prohibited.
Let’s take a peek at what those are:
🤝 Employer-sponsored subsidized plans
If you have access to insurance through an employer, you can’t claim the write-off. This is true even if you’re just eligible to take employer-provided coverage, but aren’t actually claiming it. The rule also extends to your spouse’s coverage.
A question I regularly hear is: “What if I’m included on my spouse’s coverage, but pay for my portion of the premium? Can I claim those payments as self-employed health insurance?”
Unfortunately, no. You can’t claim those premiums even though you’re paying for them fair and square.
Why? Because employer-sponsored plans are “subsidized,” which basically means they get a discounted rate. In other words, you’re still benefitting to some degree from the group policy.
This brings us to another question I regularly hear: “Does marketplace insurance count as subsidized?” For purposes of this adjustment, it doesn’t. So it’s totally fair game to deduct.
It’s true the advanced Premium Tax Credit acts like a subsidy, but it’s entirely income-dependent. Many taxpayers end up paying the credit back when they file their tax return because their income was too high to qualify.
⛪ Healthcare-sharing ministries
These have gotten very popular in recent years as a religious alternative to regular health insurance. Examples include organizations like Samaritan’s Purse, Medi-Share, and Solidarity HealthShare.
They operate just like regular insurance, in that they require a monthly premium. But the money goes directly to other members to cover their out-of-pocket medical expenses. The idea is that medical bills are often more affordable when paid in cash because they circumvent the insurance process.
As creative as this idea is, it’s no-dice when it comes to the deduction. The IRS doesn’t recognize these organizations as legitimate health insurance providers.
Long-term care limits
The last limitation to be aware of is for long-term care insurance. The amount you can claim varies depending on your age. For 2022, the rates are as follows:
How to maximize your insurance write-off
Now for the good news: there are ways to work around the insurance deduction limitations. Let’s take a look at some of the easiest strategies.
Tip #1. Assign your insurance to your highest-earning business activity
You have the option to choose every year which business activity you’re assigning your insurance to every year. You should choose the Schedule C with the highest net income, but that can change from year to year.
Rule of thumb: Don’t box yourself in by prematurely assigning your insurance to a particular business activity. Wait to see how your net income shakes out before determining where to allocate your insurance.
Tip #2. Buy insurance under your personal name
This one goes hand in hand with the previous tip.
Taxpayers who know about this deduction often make the mistake of registering for their insurance using their business name.
The thought process is easy to follow: business insurance should be purchased by the business. But this isn’t a requirement, and buying under your business name (or EIN) could cause you to miss out on planning opportunities.
Here’s why: your business name might be associated with a certain business activity. Buying health insurance under that name means you can’t then switch up which business activity your insurance is assigned to.
Tip #3. Divvy up insurance between activities
It’s great that so many types of insurance can be factored into this tax deduction. But they don’t do you any good if they’re limited by your net income.
An easy way to avoid this problem is splitting up your coverage by activity. If you have two Schedule Cs, you can allocate your dental insurance to one, and your health insurance to the other, for example. Luckily, insurance plans for things like dental and vision tend to cost less than health-insurance, so your lower-grossing activities can be useful here
Returning to the earlier example, if you spent $2,500 on dental and vision insurance, you’ll be able use your entire $7,000 of net income — even though your health insurance is limited to $5,000 and your dental and vision are limited to $2,000.
While it doesn’t fully offset the price tag, using insurance premiums to lower your taxable income is a good start towards making health coverage accessible to more people.
Hopefully health insurance will become an affordable option to everyone down the road. Knock on wood.
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At Keeper Tax, we’re on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email email@example.com if you have questions.