Question

Problem 5-2 Self-Employed Health Insurance Deduction (LO 5.2) Serena is a 40-year-old single taxpayer. She operates a small business on the side as a sole proprietorship. Her 2018 Schedule C reports net profits of $5,624. Her employer does not offer health insurance. Serena pays health insurance premiums of $7,545 in 2018. Serena also pays long-term care insurance premiums of $600 in 2018.

Calculate Serena's self employed health care deduction.

You guys have an answer. But my home is saying it's wrong..

Answer 1

Self Employed Health Care Deduction:

Self employed business owners may deduct health insurance premiums from gross income, for a reduction in taxable income.

How the Self-Employed Health Deduction Works

A self-employed business owner may deduct the cost of health insurance for himself/herself and his/her spouses, dependents, and children under 27 years old as of the end of the tax year. Under specific circumstances, he/she may also be able to deduct Medicare premiums and premiums for long-term care insurance.

To qualify, the plan must have been established under his/her business.

How Do Self-Employed Business Owner Qualify for this Deduction

Self-employed business owner can qualify depending on his/her status as a business owner and his/her profits in one of these business types:

• If the business reported a net profit for the year on Schedule C or Schedule C-EZ. This would be the case if he/she is a sole proprietor or single-member LLC owner.
• If he/she is a partner with net earnings for the year, as reported on his/her Schedule K-1 (the form that shows his/her annual earnings from the partnership)
• If he/she used an optional method to figure his/her net earnings from self-employment on Schedule SE, or
• If he/she received wages from an S corporation in which he/she was a more-than-2% shareholder.

How to Get This Tax Deduction

The premiums for self-employed health insurance are deducted from the gross income on his/her personal tax return before his/her Adjusted Gross Income is calculated.

First, you will need to determine the amount of health insurance premiums for the year, for yourself and eligible dependents.

Then, will need to use Worksheet 6-A. Self-Employed Health Insurance Deduction Worksheet, from IRS Publication 535 - Business Expenses. You'll need to use a different worksheet if your insurance is through one of the marketplace exchanges.

The form you ask you:

The amount paid in the year for "insurance coverage established under your business (or the S corporation in which you were a more­-than-2% shareholder) for you, your spouse, and your dependents."

For a qualified long-term care plan, you will need to enter the amount you paid, subject to a maximum payment amount, depending on your age. Here's the schedule:

• $390— if that person is age 40 or younger
• $730— if age 41 to 50
• $1,460— if age 51 to 60
• $3,900— if age 61 to 70
• $4,870— if age 71 or older

Then you will need to enter the net profit from your business. The amount of deduction is limited based on your business profit. No profit, no deduction.

Premiums you pay for a long-term care insurance policy may also be deductible. The deductions are limited to the lower of the amount you actually pay or a premium dollar limit based on your age.

To qualify for this deduction, you must be paying premiums for a qualified long-term care insurance contract that meets specific requirements, including that it must be renewable. The policy must provide specific long-term care services.

Restrictions on this Tax Credit

The health care premium deduction is only available against a profit; if your business had a loss, you cannot claim this deduction. Premiums for your family may also be deducted, based on the same restrictions as above.

It is only available to self-employed individuals, not corporate owners (who are not self-employed).

The deduction is also not available if you were eligible for health insurance for another employer (including your spouse's employer), even if you didn't participate in this insurance coverage.

Serena's Self Employed Health Care Deduction

Serena's business reported a net profit of $5,624 in her Schedule C. Her employer does not offer health insurance. Serena paid health insurance premiums of $7,545 in 2018. Serena also paid long-term care insurance premiums of $600 in 2018.

Serena's total health care amount eligible for deduction is $7,935 ($7,545 for health insurance premium + $390 for long-term care insurance premium). However, this deduction is limited to the amount of net profit of the business. Therefore, Serena will be eligible for a total health care deduction of $5,624 (upto the amount of Net Profit of the business) as this deduction is only available against a profit.