If you own your own business, your health insurance considerations are liable to be different than those of the typical salaried worker. For starters, the IRS permits business owners to claim their own health insurance costs as a “business deduction.” This is one of the biggest incentives for American companies to provide health insurance for their workers. It’s doubtful that so many companies would still provide this benefit in the absence of such a tax break. Like many business decisions, providing health insurance simply makes good financial sense.
If your business is relatively small, your health insurance considerations could be downright confusing. The tax implications of your personal health insurance plan may be confusing as well. Sole proprietors, partnerships, “S-corps” and small-business LLCs must abide by certain rules during the deduction-claiming process. Chief among these is the requirement that they provide health insurance for their employees on a pre-tax basis. If your business provides health insurance on a post-tax basis or fails to meet this standard in any other way, it may be ineligible for the health insurance tax deduction that its peer organizations enjoy. To learn more about the difference between pre-tax and post-tax health insurance benefits, you can browse the IRS’s website for publications on the matter.
Many small business owners don’t even provide health insurance. If your business has just a handful of employees, the financial burden of providing health insurance might not be worthwhile. While some sole proprietors establish businesses for the sole purpose of providing themselves with affordable health insurance coverage, many others simply can’t afford to do so. If this describes your situation, you probably have other means of purchasing health insurance. For starters, you could turn to your spouse. If your spouse enjoys health insurance coverage through his or her employer, you might prefer to sign on to that policy.
Unfortunately, this will cut off a potentially valuable benefit: your health insurance deduction. Even though you’re in business for yourself, you can’t legally claim the health insurance premiums that you pay to your spouse’s provider as a business expense. Such a move would constitute fraud and could be punishable by fines and imprisonment. Unless your spouse’s premiums are paid out of his or her post-tax earnings, you also won’t be able to claim his or her premium costs. In fact, you probably won’t be able to use the health insurance deduction at all. If you want to be able to deduct your health insurance premiums as a business expense, you’ll need to set up your own plan.
Am I Able to Write Off Health Insurance Premiums for Tax Purposes at the End of the Year?
If you’re like most American taxpayers, your health insurance premiums represent an enormous “overhead” expense. For many years, the cost of healthcare and health insurance has risen faster than the overall rate of inflation. Meanwhile, the recent passage of the Affordable Care Act has added a new layer of uncertainty to the healthcare market. Many insurers are taking advantage of this new climate of confusion by raising some of their policies’ premiums by 10 percent or more per year.
If you receive health insurance through your employer, you probably won’t qualify for a healthcare-related tax deduction. This is because most employers shoulder the majority of their employees’ health insurance costs. On the other hand, you may qualify for a tax deduction in the event that you experience an expensive medical emergency or round of treatment during the tax year. In order to determine your eligibility for specific tax deductions, you’ll need to check with your accountant or tax professional.
In general, you should qualify for a tax deduction on any healthcare costs that exceed 7.5 percent of your gross income. If you made $100,000 during the tax year and paid $15,000 in healthcare-related costs, you’ll be eligible to deduct $7,500 from your top-line income figure. Although high-income earners may face certain restrictions, most regular workers are eligible to claim virtually all of their healthcare costs beyond the 7.5 percent threshold. The specifics of this deduction are spelled out in IRS Publication 502.
In order to be eligible for this tax offset, you must choose to itemize your deductions. If your standard personal deduction exceeds the value of your potential itemized deductions, it may not make sense for you to use this healthcare-related tax-reduction tool. Although it fluctuates from year to year, the personal tax deduction is capable of offsetting thousands of dollars in gross income. Unless you own a house or make charitable donations on an ongoing basis, the total value of your potential itemized deductions may not exceed that of your guaranteed personal deduction.
If you’re self-employed, this healthcare deduction could be particularly useful. As a self-employed worker, you’ll be responsible for covering 100 percent of your health insurance costs out of your own pocket. As such, your insurance premiums are liable to exceed 7.5 percent of your income by a significant margin. In addition, you’ll be eligible for other key tax offsets, including the home-office deduction.