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Taxes: Self-Employed Can Deduct Health Insurance

I was doing my taxes for 2011 and was astonished to see on TurboTax that I could deduct my health-care premiums. I am self-employed, make a profit, and use the standard deductions; I do not itemize medical costs. Is this really correct? If so, can I amend my 2010 returns to also deduct my premiums for that year? —B.C., Salinas, Calif.

As long as your health insurance is established in your name or the name of your business, and you don’t have the option to get coverage through another source—such as a spouse’s employer-provided plan—you absolutely can deduct your health care premiums. You do not have to itemize medical expenses to take the deduction.

“The self-employed health insurance deduction is one of the most powerful deductions you can take—and one of the single most-powerful ways to address the affordability of health insurance,” says Keith Hall, a certified public accountant and tax adviser for the National Association for the Self-Employed, which is based in Annapolis Junction, Md. Health insurance is a so-called “above-the-line” deduction, which means it reduces your adjusted gross income dollar-for-dollar. “Depending on your tax bracket, it could represent a substantial reduction in your tax” liability, Hall says.

You should report the deduction on line 29 of your IRS Form 1040. You can include premiums paid on qualified long-term-care insurance, if you purchase that as well. In addition to what you found in your tax preparation software, you can get instructions on filling out your 1040 here, and in IRS Publication 535, which discusses the self-employed health insurance and long-term-care deductions here. Instructions for free e-filing of 2011 returns are available here.

If you’ve shown a net profit in recent years and you’ve been buying health insurance because you haven’t had access to employer coverage, consider amending your earlier returns. One note: You can’t deduct coverage you’ve gotten through a spouse’s policy, even if you must pay for that coverage. The policy must be established in your name or in the name of your small business.

Under IRS policy, you can amend returns this year, as far back as tax year 2008. “Since this is found money and you’re likely to get refunds, it’s probably worth having a tax preparer look over those earlier returns to see if there’s anything else you missed” before you file your amendments, Hall says.

Consider Consulting an Accountant

Melanie Lauridsen, a tax staffer at the American Institute of Certified Public Accountants in Washington, agrees. “Most likely, the benefit you’ll get from amending the returns will be greater than the cost of paying an accountant a fee” to comb over your earlier filings and make sure they are all correct, she says. Missing something as important as the health insurance deduction “is why we stress out about people doing their own returns when they become self-employed,” she adds.

Because your California state tax liability is calculated in accordance with your federal 1040 numbers, think about amending your state returns as well. But be careful: State taxes are generally lower than federal, so file the amendments yourself or make sure the cost of amending the returns will be covered by refunds.

One self-employment health insurance deduction that applied to tax year 2010—established by the Small Business Jobs and Credit Act of September 2010—will not be available for tax year 2011. The deduction, which leveled the playing field for self-employed individuals by allowing them to deduct the full cost of health insurance premiums from their payroll taxes, as other business entities do, has expired.

Congress has not renewed it and is not expected to do so, says John Arensmeyer, executive director of Small Business Majority, an advocacy group in Sausalito, Calif. “It’s terribly unfair that self-employed people have to buy insurance with after-tax dollars when no one else does, but this issue [renewing the one-year insurance payroll tax deduction] is going nowhere in the Senate,” Arensmeyer says. The discrepancy particularly hurts a vulnerable, self-employed population, he says. Research conducted by the Henry J. Kaiser Family Foundation shows that most of the more than 49 million Americans who are uninsured are either self-employed or work for very small businesses that do not provide insurance coverage.

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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