Premium tax credit and self employed health insurance deduction

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• 12599: Advising Taxpayers About the Premium Tax Credit vs. the SE Insurance Deduction

How do I advise taxpayers about taking the PTC (Premium Tax Credit) or using the SE (self-employment) insurance tax deduction?

As a preparer you will want to explore the options available. You will need to look at the tax consequences for each action.

Some taxpayers may be eligible for both a self-employed health insurance deduction and the PTC for the same premiums. See Pub. 974, pages 57-75 for more details. 

Questions to ask include:

1. How many people are in the taxpayer’s family and would need to be covered by insurance?
2. What is the household income for the taxpayer?
3. Where does the taxpayer’s household income fall in reference to the federal poverty line (FPL)?
4. What is the comparison between the cost of private insurance and that of purchasing insurance through a state or the federal exchange?
5. Will the taxpayer qualify for the Premium Tax Credit (PTC)?
6. Does the taxpayer plan to take an advance payment of the PTC?
7. If the taxpayer qualifies for the PTC, does the taxpayer also qualify for cost-sharing reduction (lower insurance payments, lower out-of-pocket costs)?
8. Will the taxpayer qualify for Medicaid in the taxpayer's state?
9. If the taxpayer could qualify for Medicaid, where does the resident state stand on Medicaid expansion?
10. What kind of penalty will the taxpayer face if the taxpayer does not purchase health insurance?
11. How will the PTC or penalty for non-insurance affect the taxpayer’s return?
12. How will the deduction of self-employed health insurance impact the bottom line on the taxpayer’s return?

For more information, see the IRS website Affordable Care Act (ACA) Tax Provisions.

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Across America, a wide variety of unique employment situations have materialized. Some people work multiple jobs. Some have ceased their commutes to work from home indefinitely. And others still have left the corporate setting completely to become entrepreneurs, or even self-employed “solopreneurs.”1

Going from having employer coverage to purchasing your own individual health insurance policy can come with a certain amount of confusion about the process and variation in costs. Indeed, health insurance premiums have been increasing over the last 10 years.2

Premium tax credits, or subsidies, can be helpful for the self-employed, who have traditionally had to foot the entire bill. If you’re self-employed, you may be eligible for the self-employed health insurance deduction.3

How Do I Get Insurance If I Am Self-Employed?

Like any other Affordable Care Act-approved plan on the individual Health Insurance Marketplace, self-employed health insurance plans can only be purchased during an Open Enrollment Period unless you have a qualifying life event.6

No matter what, learning about the self-employed health insurance deduction can be helpful for those who will need to cover the cost of health insurance on their own.

The self-employed health insurance deduction is a tax benefit allows 100% of health insurance premiums for you and your dependents to be deducted on your tax return.7 Self-employed health insurance deductions are applicable to insurance premiums for medical, dental, or long-term care insurance.8

Deduction Eligibility

According to the IRS, you may qualify for the self-employed health insurance deduction if one of the following applies to you:8

• You had a net profit from self-employment.
• You had self-employment earnings as a partner.
• You used an optional method to figure your net earnings from self-employment.
• You were paid wages reported on Form W-2 as a shareholder who owns more than 2% of the stock of an S-corporation.

Long-Term Care Premium Deductions

There is a set limit on how much you can deduct for your long-term care insurance premiums. As of 2020, the total deduction was as follows:8

• Age 40 and younger: $420
• Age 41-50: $790
• Age 51-60: $1,580
• Age 61-70: $4,220
• Age 71 and older: $5,270

How Can a Self-Employed Person Get Health Insurance?

A self-employed person can get health insurance by applying during the Open Enrollment Period,4 which occurs November 1 - December 15. If you do not enroll during this window, you may only apply for coverage if you qualify for a Special Enrollment Period.9 When you do apply, be sure to check your eligibility for a self-employed health insurance deduction. 

HealthMarkets can help you compare your health insurance options. With our FitScore® technology, we can search thousands of plans from hundreds of insurance companies to help you find the plan that fits your needs. Start comparing your options and find a self-employed health insurance plan today.

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References:
1.Forbes. December 2020. Retrieved from https://www.forbes.com/sites/henrydevries/2021/12/29/how-solopreneurs-reap-the-rewards-of-repeat-business/?sh=ca7a91615427 | 2.ValuePenguin. January 2021. Retrieved from https://www.valuepenguin.com/average-cost-of-health-insurance | 3.IRS. January 2021. Retrieved from https://www.irs.gov/taxtopics/tc502 | 4.HealthCare.gov. Retrieved from https://www.healthcare.gov/self-employed/coverage/ Accessed on January 7, 2021 | 5.IRS. May 2020. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues | 6.HealthCare.gov. Retrieved from https://www.healthcare.gov/small-businesses/learn-more/self-employed/ Accessed on January 7, 2021 | 7.UHC. Retrieved from https://www.uhc.com/individual-and-family/health-insurance-plans/self-employed-plans Accessed on January 7, 2021 | 8.IRS. March 2020. Retrieved from https://www.irs.gov/publications/p535#en_US_2019_publink1000208843 | 9.HealthCare.gov. August 2020. Retrieved from https://www.healthcare.gov/blog/open-enrollment-2021-dates/ 

Disclaimer:
The information in this article is not offered as legal or tax advice. We suggest that you seek the advice of your tax advisor, attorney, and/or financial planner to make certain you obtain the tax deduction(s) you are entitled to. All material is presented solely as educational information.