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For Self-employeds: A New Tax Prescription for Health Insurance
At long last, self-employed taxpayers are on the same tax footing as other business entities concerning health insurance. They can deduct 100% of their health insurance premiums, including amounts paid for family coverage, up to the amount of net income from the business. In the not-so-distant past, deductions were limited to a percentage of the cost. However, the deduction is not permitted for any month in which the taxpayer participates in a plan maintained by an employer or the employer of a spouse.
New ruling: According to a new pronouncement from the IRS Office of Chief Counsel, a sole proprietor can deduct health insurance costs from the earned income of the business when the policy is purchased in the individual's name-not the business. This gives self-employeds even greater flexibility than they had before.
On the other hand, there is some potential bad news in the ruling. The IRS also said that the owner of multiple businesses cannot aggregate the profits and losses from those businesses in order to maximize the net income limit. In other words, for one health insurance plan, you can only count the income from one business.
There may be a way to turn this rule to your tax advantage. For instance, you can use the net income limit of one business for a health plan and another business for a dental plan. This could provide a bigger deduction than you would be entitled to claim if both plans were under the umbrella of the same business.