By Maria Valdez Haubrich
The new health insurance regulations are complex and can be confusing—especially when it comes to tax time. However, there are some tax breaks related to the new laws that you won’t want to miss out on. To help, eHealthInsurance.com has created the following list of tips to help self-employed people and small business owners take advantage of all possible health-insurance related deduction – including a new, one-time-only opportunity for 2010 tax returns.
- Take a one-time opportunity to reduce your self-employment taxes. In addition to the standard “above the line” deduction described below, people who are self-employed can also deduct the cost of their health-insurance premiums from their self-employment taxes on Schedule SE. This is a one-time-only opportunity available for 2010 taxes, so if you’re self-employed, be sure to take advantage of it.
- Deduct health-insurance premiums as a business expense. If you had self-employment income in 2010, you may also be able to deduct health insurance premiums you paid for yourself and your dependents as an “above the line” business expense (that is, without itemizing) on your federal tax return.
Be aware, however, that you may not deduct premiums paid for any month in which you were eligible to participate in an employer-sponsored health insurance plan, and that the amount you deduct cannot be greater than your net self-employment income for the year. Also, keep in mind that you may not be able to include what you paid toward your monthly premiums as an “above the line” expense and itemize it as described in the next tip. Talk to your tax professional to learn more about the different types of self-employment status and the tax implications of each in your state.
- Itemize your health insurance and medical expenses. If you itemize on your federal tax return you may be able to deduct medical expenses from your taxable income. According to IRS Publication 502, qualifying medical expenses include monthly premiums you pay for coverage (including some Medicare premiums), copayments, deductibles, dental expenses, and costs for some services not covered by your insurance plan. Keep in mind: You can only deduct the portion of your medical expenses that exceeds 7.5 percent of your adjusted gross income (AGI). That means this deduction isn’t for everyone, but if you (or one of your dependents) were seriously ill or hospitalized last year, you may qualify.
- Maximize your refund with your Health Savings Account (HSA). An HSA is a tax-advantaged savings account used in conjunction with an HSA-eligible health insurance plan. Account contributions, qualified distributions and earnings are all tax-exempt. An HSA allows you to deposit a portion of your pre-tax income into a savings account and use those funds to pay for qualified medical expenses. Unused money can be invested and accrue from year to year. If you have an HSA, be sure to deduct your contributions up to federally prescribed limits. Contributions to your HSA designated for 2010 and made before April 18, 2011 can be counted toward your 2010 federal taxes. According to IRS Publication 969, HSA contributions for the 2010 tax year are capped at $3,050 for individuals and $6,150 for families.
- Be aware of how the COBRA subsidy may alter your taxable income. If you were laid off and chose COBRA coverage while starting your own business, be aware of how COBRA can affect your income. Those enrolled in COBRA as the result of a layoff after June 1, 2010 no longer qualified for the 65 percent federal COBRA subsidy, but plenty of people who did qualify for the subsidy were still receiving it in 2010. If you received the COBRA subsidy, your taxable income may increase depending on how much money you made in 2010. If your adjusted gross income was between $125,000 and $145,000 ($250,000 – $290,000 for those filing joint returns), you may only be eligible to retain a portion of that subsidy. If your adjusted gross income was greater than $145,000 ($290,000 for joint-filers), you are not eligible for the subsidy and should review your tax liability for the subsidy carefully.
Of course, this advice isn’t suited for every business, so be sure to check with your accountant or tax preparer to take the steps that are right for you.
Image by Flickr user Clever Cupcakes (Creative Commons)
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