Self-Employed? Tips on Reducing Health Care Costs

January 18, 2012 by Ed Becker

Health Insurance Deduction

Did you know that for 2011, there is a self-employed health insurance deduction? Eligible self-employed individuals and S-corporation shareholders can use the self-employed health insurance deduction to reduce their income tax liability.

It’s not too late the claim the deduction if you’re eligible.

Who is covered?

The deduction includes premiums paid for health insurance covering the taxpayer. Spouses and dependents generally qualify for this deduction as well.

In addition, premiums paid to cover an adult child under age 27 at the end of the year, also qualify, even if the child is not the taxpayer’s dependent. The definition of “child” for this purpose includes the individual’s:

• child
• stepchild
• legally-adopted individual
• an individual lawfully placed with the employee for legal adoption
• an eligible foster child

Previously, the child would have had to qualify as a dependent, but now the definition is a bit more flexible. No other requirements apply so long as the individual meets the definition of a child and has not reached age 27 by the last day of the year. Even a married child is included by this definition!

Notes:

• the married child’s spouse and/or children are not covered.
• a child attains age 27 on the 27th anniversary of the date the child was born (for example, a child born on April 10, 1983 attained age 27 on April 10, 2010).

However, the deduction from self-employment income for determining self-employment tax, which was available only in tax-year 2010, no longer applies.

What hasn’t changed?

As before, the insurance plan must be set up under the taxpayer’s business, and the taxpayer cannot be eligible to participate in an employer-sponsored health plan from a separate employer.

Changes for HSAs and MSAs

Starting in 2011, the additional tax on distributions from a health savings account (HSA), not used for qualified medical expenses, increases from 10 percent to 20 percent.

Presently, taxpayers can only deduct medical expenses if they itemize their deductions. In addition, medical expenses are only deductible if they exceed 7.5% of a taxpayer’s income (AGI), and then only the amount that exceeds that income limit is actually deductible. The income limit is 10% higher for those taxpayers subject to the alternative minimum tax (AMT).

Big Changes for 2013

As part of the 2010 Health Care Legislation, the AGI limitation is being increased to 10% starting in 2013. However, for seniors (age 65 or older and their spouses) the limitation is being phased-in over two years and remains at 7.5% for 2013 and 2014.

For planning purposes, pay discretionary medical expenses before 2013. Taxpayers with potential discretionary medical expenses, such as orthodontist or dental work, vision care, etc., should consider having work done and paid for before 2013.

Once a taxpayer’s expenses exceed the income limits, every additional dollar spent on medical for the year becomes deductible. Therefore, once the minimum is met, it is important to utilize every legal expense. In addition, if you only marginally qualify for medical deductions each year, it may be appropriate, when possible, to have most medical deductions in one year to maximize the benefit.

Taxpayers whose medical expenses do exceed the income limitation should also make sure they do not overlook any deductible medical expense. Are you confused? You are not alone and can thank Congress for the complexities.

For help sorting all this out, speak with your bookkeeper or accountant who should be able to provide you with information specific to your situation. I also invite you to send your questions to me by adding a comment below, or to contact me about OSYB’s bookkeeping services.