Self-employeds can deduct a percentage of their health insurance costs

Self-employed taxpayers can deduct 60% of their health insurance costs in 2000, increasing to 70% in 2002, and 100% in 2003 and later years. These tax savings can reduce your after-tax cost of health coverage.

A brief review of the tax rules on health insurance premiums may be useful. Health insurance premiums are deductible as itemized medical costs, but only to the extent your total medical expenses exceed 7.5% of adjusted gross income (AGI). If total medical expenses don't exceed 7.5% of AGI, no itemized deduction is available. However, a self-employed taxpayer in these circumstances can nevertheless deduct 60% (in 2000) of health insurance costs as a 'nonitemized' deduction, reducing AGI. (The remaining 40% counts as part of the other 'itemized' medical costs.)

Example. In 2000, Max, a self-employed taxpayer, pays $3,000 in health insurance premiums and has no other medical expenses. His AGI is $50,000. Since 7.5% of $50,000 equals $3,750, Max isn't able to claim any itemized deduction for his medical expenses (the health insurance premiums). However, he can deduct $1,800 (60% of $3,000) under the rules allowing self-employed taxpayers nonitemized deductions for a percentage of their health insurance.

These rules only apply for any calendar month in which you aren't otherwise eligible to participate in any subsidized health plan maintained by any employer of yours or of your spouse.

Also, no deduction is allowed to the extent that the deduction exceeds your earned income from the trade or business with respect to which the plan providing the medical care coverage was established. These rules also apply to partners in partnerships and more-than-2% shareholders of S corporations where the partnership or corporation pays for health insurance coverage for its partners or shareholders.

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