Health insurance premiums are becoming more and more costly. If you’re a self-employed trader who is paying for health insurance, you may be entitled to a health insurance tax deduction. Active traders who qualify are allowed to deduct 100% of their health insurance premiums for themselves, their dependents, and spouses.
Self-employed health insurance deductions apply only to federal, state, and local income taxes. Not to self-employment taxes. The great news is that there are different ways that traders can deduct health insurance expenses from their earnings.
To qualify for this deduction:
You may not file for this deduction if you are eligible to partake in a health insurance plan that your employer or your spouse’s employer offers
You may only apply income from a single business that designates itself as your health insurance plan sponsor. Day traders may not combine income from other businesses for income limit purposes
Claiming The Deduction
Self-employment taxes are factored in by the totality of your business income. Any income you calculate into Schedule C. Enter your self-employment health insurance deduction on Form 1040.
Personal Income Tax Deduction for the Self-Employed
This tax deduction encompasses long-term care and dental coverage. LLC members, S corporation shareholders, and partners in partnerships can use this type of deduction.
Problem for Sole Proprietor Traders
Sole proprietor traders have one limitation. You are only permitted to deduct as much as you earn from your trading business. If your business does not make a profit, the deduction can’t be applied. Sole proprietor traders may run into this type of scenario with their annual income.
The IRS classifies gains as unearned income. If a sole proprietor trader makes a profit, they still can’t take home the health insurance deduction because their business has no earned income. If you’re one of those sole proprietors, there are solutions available, but you’ll miss out on this deduction.
How Traders Can Take the Self-Employed Health Insurance Deduction
In order to get past the business income limitation, you would need to form an entity. Traders can establish an S Corporation or a Limited Liability Corporation to open up a health insurance deduction. Please keep in mind that this deduction is not considered a business expense and is not deducted on a business tax return.
How An S Corporation Deducts Health Insurance Premiums
If a trading business is considered an S Corporation, your deduction is limited to the number of wages your corporation pays you. The insurance costs are added to your earnings and deducted by the S Corporation.
How A Partnership And LLC Deduct Health Insurance Premiums
If your business is considered a partnership or an LLC, then health insurance premiums are looked at as a guaranteed payment. The business records the amount on Schedule K1, and you will then report this income from the LLC on your personal tax return. You are then held responsible for self-employment taxes and income from that amount.
Active participating members in an LLC that’s treated as a partnership and partners in a partnership can claim this on their tax return if they have self-employed income.
You may still take into account the self-employed health insurance deduction. This deduction will completely wipe away the extra income tax you have to pay. But this does not reduce the self-employment taxes that are due on your personal tax return.
The Bottom Line
Self-employed health insurance premiums are valuable and a very substantial tax break for traders, but there are several hoops to jump through. But if you have the patience to push through that will help you save thousands of dollars, it will be worth your while.
If you have questions, do not hesitate to contact us at Traders Accounting for clarification.