The Internal Revenue Service allows self-employed individuals to deduct their health insurance premiums, with some conditions. The insurance must be in the name of the covered individual or his business, and the individual may not deduct any premiums still paid by a former employer. The rules apply to policies on the individual market as well as COBRA premiums paid by former employees.
The COBRA Basics
Created by a federal law, COBRA continuation coverage allows workers to continue their enrollment in an employer-sponsored health plan after termination from work. In most cases, the former employee pays 100 percent of the premium, with no employer contribution. Some employers will pay a portion of a COBRA premium but the law does not require it.
Taking the Deduction
A few rules apply to the self-employed health insurance deduction. You may not claim it for any months you were eligible for an employer-sponsored plan, and the amount of the premiums can't exceed your net business income. You claim the deduction -- which is technically an adjustment to income -- by completing Line 29 of Form 1040. This amount is added to other adjustments, including individual retirement account contributions, health savings account contributions, alimony, tuition, and student loan interest. The total adjustments are subtracted from your gross to reach your adjusted gross income, or AGI. The IRS does not require documentation of the COBRA premiums you paid but may ask for proof of the payments if your return is audited.
The ACA and COBRA
The Affordable Care Act, which passed in 2010 and went fully into effect in 2014, allows individuals to purchase insurance through public health-insurance exchanges. The law allows you to apply a tax credit to the premium cost, with the amount of the credit varying on your income level and the local average cost of health insurance. There is no tax credit available for "off-exchange" policies or COBRA coverage, and for this reason many self-employed individuals would find the exchanges a more economical alternative to continuing on their former employers' health plans.
If you are now paying health insurance premiums out of pocket -- whether or not you are self-employed -- you may subtract them from your adjusted gross income as itemized deductions. This is done with Schedule A; you may deduct that portion of all medical expenses including insurance that exceeds 10 percent of your adjusted gross income -- 7.5 percent if you are 65 or older. You may not take COBRA premiums as an itemized deduction, or as the self-employment health insurance premium adjustment to income, and then deduct them as a business expense on Schedule C.
- BananaStock/BananaStock/Getty Images
- Is Workers' Compensation Considered Income When Filing Taxes?
- What Could Be a Pretax on a W2?
- Are Prescription Co-Payments Tax Deductible?
- Are Cobra Payments Deductible for Income Tax Filing?
- Are Health Insurance Premiums and Medical Bills Tax-Deductible?
- Can I Take a Deduction for Pretax Health Dollars?
- Do Braces Count as an Itemized Deduction on Taxes?
- Is Short-Term Disability Considered on a Before-Tax or After-Tax Basis?