(Editor’s note: Today we hear from Argel Sabillo, Co-Founder of Levee, the app that tracks and categorizes business expenses and miles, then files your taxes via its affordable online accountants. Tax issues are complicated, so please be sure to consult a tax advisor about how the information below applies to you.)
As a self-employed individual, it’s important to have basic medical coverage for preventative care and large hospital bills. However, due to rising medical and insurance costs, and increasing deductibles and copayments, many self-employed individuals are adding voluntary insurance for additional personal and financial protection.
What is voluntary insurance?
Voluntary insurance is an additional insurance option that helps pay for bills not covered by your medical insurance. Voluntary coverage includes paying for deductibles, copayments, and other expenses that can add up if you’re too ill to work – for example, your mortgage or rent, utility bills, car payments, and credit card debts, that still need to be paid.
Not all voluntary insurance are tax deductible. Below, we’ll explore the medical, dental, vision, disability, life and long-term care insurance premiums and determine what expenses are eligible for tax writeoffs.
Medical and Dental Insurance Premiums
The amount you pay for your medical and dental insurance policies are eligible business expenses which can be written off for tax purposes. Even if the insurance covers your spouse, your dependents, and your non-dependent child who is under age 27 at the end of the year, the premium payments are tax deductible. Get Medical & Dental Insurance
Vision Insurance Premium
In general, your vision insurance premium does not qualify as an eligible business expense. However, you can claim the premium payments if you itemize your tax returns. In some cases, vision insurance premium is tax deductible, but only if it’s part of your medical coverage.
For example, there are medical benefits plans which cover eye care services as well. Such combined policies only require you to pay one premium, which is tax deductible.
In contrast, if you signed up for stand-alone vision insurance that provides, for example 20% off on your prescription glasses and contacts, then the premium is not deductible as a self-employed expense. You may, however, claim the premium payments and other vision expenses as a qualified medical expenses on Schedule A subject to the 10% limit (or 7.5% if either you or your spouse was born before January 2, 1950). Get Vision Insurance
Short Term Disability and Life Insurance Premium
The general rule is that any insurance premium paid that pays out benefits to supplement your income is non-deductible. However, the benefits you receive from the insurance company may not be taxable.
For example, if you received short-term disability benefits for lost wages or proceeds from life insurance contract from an insurance company, the amount received may not be taxed. If the IRS is not taxing you on your income benefits, then you don’t get to write off your short term disability insurance or life insurance premium. Get Life & Disability Insurance
Long Term Care Insurance Premiums
Long term care insurance (“LTC”) policies are tax-deductible, but are limited based on the age of the person insured. Below is provided by the IRS which illustrates the maximum premiums you can deduct every year per person:
- Age 40 or under – $370
- Age 41 to 50 – $700
- Age 51 to 60 – $1,400
- Age 61 to 70 – $3,720
- Age 71 or over – $4,660
For example, if you’re 27 and you purchased a LTC policy, you can deduct up to $370. So if you only paid $300 in premium for the year, then you can only deduct $300. However, if you paid $500 for the year, you can deduct $370 and itemize the rest.
Guidelines for claiming write-offs
You must be self-employed and have had a net profit for the year in a particular trade or business. The insurance policy must be in your name or in your business’ name. If you have multiple trades or businesses, you must pick which trade to establish the policy under. You cannot combine multiple trades or businesses into one Schedule C.
Overwhelmed? Here are some clarifying examples
If you’re a rideshare driver and a freelance photographer, then you have two different trades or businesses. The IRS requires you to select which of the two trades you will establish your insurance policy under. You can only write-off your premiums if the trade or business is profitable. Therefore, if historically your photography business has been profitable, you should establish your policy under that business.
If you’re not sure which business will be profitable in the future, the IRS allows you to split the policies between your two businesses. For example, you can establish your medical insurance policy under the photography business and your dental and LTCi policies under the rideshare business.
You can only write off up to the amount of the net profit in a particular trade or business that the policy was established under. Any excess amount can be written off as a non-business medical expense, but only if you itemize your tax returns.
You cannot write off the premium paid for any month that you were eligible to participate in any employer (including your spouse’s) subsidized health plan, even if you did not actually participate.
If your net profit from the photography business is $1,000 and you had $1,200 in medical premiums ($100 per month), then you can deduct $1,000 in self-employed health insurance deduction. The other $200 could be deducted on tax form Schedule A, if you’re itemizing.
What if you, or your spouse, got a full-time job on November 1st and had the option to sign up for medical insurance through your employer? Then you can deduct your premium from Jan 1 – October 31. The premium from Nov 1 – Dec 31 cannot be claimed as a self-employed health insurance deduction.
When to Deduct Premiums
As a self employed taxpayer, you generally deduct insurance premiums in the year you actually paid them even if you incurred them in the previous year. If you prepay your insurance premiums, you generally can’t deduct expenses in advance – you have to allocate the expenses over a period of time and only deduct expenses that apply to the current year.
Where to Claim Your Deductions
You’ll claim the deductions on tax form 1040 line 29, and not on Schedule C. Any amount that you weren’t allowed to write off for business should be claimed on Schedule A when itemizing your tax returns.
When calculating self-employment tax, you cannot subtract the self-employed health insurance deduction when calculating your net earnings from the business which the insurance plan was established under.
The Bottom Line
If you qualify for tax deductible voluntary insurance premiums, you can claim these tax breaks to save on the rising cost of insurance premiums. In addition, having adequate insurance gives you, and your family, a peace of mind that may mean much more than the dollars you save.