As a small business owner, you might be wondering if you have the ability to write off your health insurance premiums as a tax deduction. Are health insurance premiums tax deductible? is the core question here. Let’s explore the different options you have regarding your health insurance premiums and how to properly deduct them to avoid an audit.
First, realize that not all health insurance programs are the same, and not all can be deducted in the same way, if at all. As a small business owner, many of you are paying for your own health insurance premiums, and generally when you pay for your own premiums, you can write-off those expenses.
Research your state’s income tax laws to better understand your responsibilities, but the best way to be sure of your tax responsibilities and the deductions that you’re eligible for is to seek the advice of a professional CPA. That way, you’re in good hands, and you know that you’re receiving advice from a professional. Having a CPA in your corner will help you to make wise financial decisions all year, as well as ensuring that you’re going about your deductions correctly and legally.
For now, let’s look at some examples regarding the deductibility of health insurance premiums, along with general advice on these tax situations.
Are Out-of-Pocket Premiums Tax Deductible?: Yes.
If you’re self-employed as a small business owner, your health insurance premiums are likely deductible; however, certain conditions apply. When asking, ‘are health insurance premiums tax deductible,’ you need to be aware of your eligibilities and payment methods for your premiums.
If you are not eligible for coverage through other means, like your spouse or partner’s employer-provided insurance, and you pay your own premiums out of pocket, you may be able to write off these expenses.
If you were eligible for coverage under another employer-provided plan for a number of months, you cannot deduct for those months. Keep in mind, writing off premiums totaling more than your business’s income is not allowed. For example, if you paid $1,200 in premiums for the year, but your business made only $1,000 after losses, you can’t write off the entire $1,200.
Make Sure You’re Doing It Right
If you’re a sole proprietor, your total deductions would be recorded on the first page of the 1040 form, not on the Schedule A form where your other business tax deductions would go. Why is this? When you are your own boss (self-employed, in other words) your health insurance is an income adjustment.
If you’re an S-corporation, the exact protocol is a little more difficult. The greatest option is to allow the S-corporation to pay your premiums directly; however, if you pay out of pocket, you might not be entitled to writing-off those expenses. You do have the option of having the S-corporation reimburse you for your premiums. Don’t forget to properly notate the premiums on your W-2 form.
Keep careful payment records to show to your tax preparer in order to correctly deduct your health insurance premiums. A qualified tax preparer, accountant, or CPA can point you to your most optimal options for deducting your premiums so that your chances of being audited do not increase.
Are Pre-Tax Money Deductions Tax Deductible?: No.
If you have health insurance through an employer and the premiums are subtracted from your paycheck, it’s important to know how this is done. Most of the time, health insurance premiums are subtracted from your paycheck before taxes. This means that your premium was paid with pre-tax money. If your premium was subtracted from your paycheck after taxes have been calculated, your premium was paid with after-tax money.
If your premium was paid with pre-tax money, it is not eligible to be written off during tax season. Since the premium already received the benefit of not being additionally taxed as it would be with after-tax payment, you cannot request a tax benefit on the same premium a second time.
If your premium was paid with after-tax money, there’s a chance that you’re eligible to write-off the portion that you paid for. If the entire premium came out of your paycheck after taxes were already figured for your paycheck, you can deduct the expense. If only a portion of your premium was subtracted from your paycheck and the rest was covered by your employer, you’re likely eligible to claim the portion you paid for.
Are Premiums Paid for by Another Party Tax Deductible?: No.
If your premiums, or a portion of your premiums were paid for by your employer, those premiums are not eligible for deduction. You cannot claim the portion that your employer paid for, but you may be able to claim any percent of the premiums you paid yourself.
This counts for government payment as well. If your health insurance is paid for by the government, it is not deductible. If you purchased your health insurance from the Healthcare Marketplace or a similar program and you received a tax credit on your premiums, you cannot claim the credited portion on your taxes. If there was a remaining balance that you covered yourself, you may be entitled to write-off that sum only.
What About Medicare?
If you’re legally disabled or over the age of 65, you may be receiving Medicare. Are these health insurance premiums tax deductible? The short answer is… maybe.
The supplemental medical insurance (Part B), HMO or Advantage (Part C), and voluntary prescription insurance (Part D) are deductible if certain criteria is met. You can write-off your premiums only if the total amounts paid are greater than 7.5% of your income.
As for Medicare Part A, it’s important to understand what exactly Part A is. If you’re covered by social security, Medicare Part A is automatically granted to you because of either you or your partner’s taxes were paid while you were working for an employer. Most of the time, this means that your Part A premiums are not tax deductible.
They still may be deductible if you meet the following criteria: you are not covered by social security, you’ve enrolled in Medicare Part A of your own accord (voluntarily), you did not pay taxes while you were working for an employer, and you now may for your own Part A premiums.
If You Want Accurate Advice, Then Hire a CPA
Again, to be sure of your responsibilities and take advantage of your legal deductions, you must seek the services of a qualified tax preparer, ideally a CPA. A CPA is aware of tax laws and can inform you of the most suitable go about your deductions, as well as advising money-saving strategies throughout the year. You can be confident that you’re going about your tax returns in the most accurate way that you can, because at the end of the day, these professionals work to help clients like you get the most out of federal income tax.
If you’re in the market for a reputable CPA firm, consider West Austin Tax for your income tax questions and services. You can visit our website for information, video resources, or to schedule an appointment with one of our professional CPAs, or call (512) 330-9400 for more support.
*West Austin Tax is not a CPA firm.