Self-Employed Health Insurance Deduction Enhanced

When the Small Business Jobs Act (SBJA) came out in late September, I posted about this deduction on Twitter; however, I never had time to post a full summary because of the tax deadline.  Well, the tax deadline is history and it is time to start looking at some of the new tax changes passed this year and get ready to year-end tax planning.

This was my favorite tax change so far this year – especially since I recently joined the ranks of the self-employed – and it basically allows a self-employed individual to get the same type of pre-tax treatment for health insurance that is available to employees under 125 plans.  Under the SBJA, the self-employed health insurance deduction now reduces self-employment tax in addition to ordinary tax.  This is a great extra tax reduction for sole proprietors and active partnership and LLC/LLP owners.

What would this look like?  Let’s take an active member in a profitable LLC that pays family health insurance premiums of $1,200/month.  Under old rules, the total health insurance premiums for the year of $14,400 would be a deduction on the front of the 1040 on line 29; however, this would only be a deduction against ordinary tax.  Under the new rule, the LLC member would save approximately $2,000 in self-employment tax.  This is a great benefit as long as there is net income and some self-employment tax to offset, and it is definitely needed as small business owners usually pay fairly large monthly premiums for health insurance.

Even better – the new tax rule applies to the self-employed taxpayer’s first tax year beginning after December 31, 2009.  This means that when you are doing your year-end tax planning for 2010, you may find that you have an extra tax deduction this time around.

Read more about this deduction and the SBJA