How Do I Claim the SEHI Deduction for Self-Employed Health Insurance?

Understanding how to claim the Self-Employed Health Insurance (SEHI) deduction is essential for self-employed individuals seeking tax relief on their health insurance expenses. This deduction allows eligible taxpayers to deduct premiums paid for medical, dental, and long-term care insurance.

Qualifications

To qualify for the Self-Employed Health Insurance (SEHI) deduction, individuals must meet criteria under Internal Revenue Code (IRC) Section 162(l). Taxpayers must be self-employed, including sole proprietors, partners in a partnership, and shareholders owning more than 2% of an S corporation. The deduction is available only if there is net profit from the business for the year, as reported on Schedule C, Schedule F, or Schedule K-1, and cannot exceed the earned income from the business under which the insurance plan is established.

The insurance plan must be tied to the business. For sole proprietors, this typically means the policy is in the business owner’s name. In partnerships, the policy can be in the name of the partnership or the partner, but the partnership must pay the premiums. For S corporations, the corporation must pay the premiums, and they must be included in the shareholder’s W-2 as wages.

The taxpayer, their spouse, dependents, and children under 27 at the end of the tax year must be covered by the plan. The deduction is not available for months when the taxpayer is eligible for a subsidized health plan maintained by an employer of the taxpayer or their spouse.

Calculating Premium Costs

Calculating premium costs for the deduction involves identifying all premiums paid during the tax year for medical, dental, and long-term care insurance tied to the taxpayer’s self-employment activity. Accurate record-keeping, including receipts and policy documents, is essential for verifying the deduction. Changes in insurance plans, like premium adjustments, should also be noted.

The deductible amount cannot exceed the self-employment income reported. For instance, if a sole proprietor has $50,000 in self-employment income and pays $10,000 in health insurance premiums, the full $10,000 can be deducted. However, if the income is $8,000, the deduction is limited to that amount.

Deductible Premium Categories

The IRS permits deductions for several insurance types beyond standard health insurance. Medical insurance premiums are the primary category, but dental insurance premiums, covering routine care, orthodontics, and other oral health services, also qualify.

Long-term care insurance premiums are deductible but subject to age-based limits. For example, as of 2024, a 55-year-old taxpayer can deduct up to $1,790 in long-term care premiums. Additionally, Medicare premiums, particularly Parts B and D, are deductible.

Family Coverage Allocation

Allocating premiums for family coverage requires precise accounting. The IRS allows deductions for premiums covering the taxpayer’s family, but accurate allocation is necessary to avoid discrepancies during tax filing.

If a family plan costs $12,000 annually and covers the taxpayer, their spouse, and two children, the premium should be divided evenly or according to the insurer’s specified allocation. If a family member is eligible for a subsidized employer plan, their portion of the premium may not be deductible.

Filing and Reporting Steps

Claiming the SEHI deduction requires precise filing to comply with IRS rules. It is reported on Form 1040, specifically on Schedule 1, which consolidates adjustments to income. This adjustment reduces adjusted gross income (AGI), offering a direct tax benefit. It is not an itemized deduction, meaning it can be claimed regardless of whether the taxpayer itemizes or takes the standard deduction.

Taxpayers must maintain detailed documentation, including premium payment records, policy agreements, and proof of business income. Sole proprietors must reconcile the deduction with Schedule C income, while partners and S corporation shareholders must ensure consistency with their Schedule K-1 or W-2 forms. Errors in reporting can lead to audits or penalties, so consulting a tax professional is advisable for complex situations.

Partnerships and S Corporation Arrangements

For partners in partnerships and shareholders in S corporations, claiming the SEHI deduction involves additional considerations. These business structures introduce complexities in how premiums are paid, reported, and deducted.

In partnerships, the partnership may pay the health insurance premiums on behalf of the partner, or the partner may pay them directly. If the partnership pays, premiums are treated as guaranteed payments under IRC Section 707(c), included in the partner’s income, and reported on Schedule K-1. Partners can then deduct the premiums on their individual returns if they meet eligibility criteria.

For S corporation shareholders owning more than 2%, the corporation must pay the premiums directly or reimburse the shareholder. These premiums must be included in the shareholder’s W-2 as taxable wages, as required by IRS Notice 2008-1. The shareholder can then deduct the premiums on their personal return, subject to the earned income limitation. Proper documentation is critical to avoid misclassification and ensure compliance with tax and payroll regulations.