Self-Employed Health Insurance Deduction

You can deduct 40% of the amount paid during 1997 for medical insurance and qualified long-term care insurance premiums for yourself and your family, if you are:

1.Self-employed, 2.A general partner (or a limited partner receiving guaranteed payments) in a partnership, or 3.A shareholder owning more than 2% of the outstanding stock of an S corporation.

You are allowed this deduction whether you paid the premiums yourself or your partnership or S corporation paid them and you included the premium amounts in your gross income. Take this deduction on line 27 of Form 1040.

Percentage increases after 1997. For tax years beginning after 1997, the deductible percentage of your self-employed health insurance premiums gradually increases. The increases for later tax years are shown in the following table.

For Tax Years Beginning in:Deductible Percentage1998 and 1999452000 and 2001502002602003 -- 200580200690After 2006100

Long-term care insurance deduction. Beginning January 1, 1997, qualified long-term care insurance contracts are generally treated as accident and health insurance contracts. You can deduct the premiums you pay for your employees as an employee benefit as discussed in chapter 5. Include these amounts in your employees' gross income. (The employees may be able to deduct the premiums as a medical expense. Medical expenses are explained in Publication 502, Medical Expenses.)

If you are self-employed and pay long-term care insurance premiums when figuring your self-employed health insurance deduction, include the lesser of:

1.The amount you pay, or 2.The amount shown below.

òAge 40 or less-$200 òAge 41 to 50-$375 òAge 51 to 60-$750 òAge 61 to 70-$2,000 òAge 71 and above-$2,500

Use your age at the end of the tax year.

Long-term care insurance contract. A long-term care insurance contract is any insurance contract that only provides coverage of qualified long-term care services. The contract must:

1.Be guaranteed renewable, 2.Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract may, be used only to reduce future premiums or increase future benefits, 3.Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed, 4.Generally, not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to expenses.

Qualified long-term care services. Qualified long-term care services are:

1.Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and 2.Maintenance or personal care services

that are required by a chronically ill individual and prescribed by a licensed health care practitioner.

Chronically ill individual. A chronically ill individual is a person who has been certified as one of the following:

1.An individual who, for at least 90 days, is unable to perform at least two activities of daily living without substantial assistance due to loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence. 2.An individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment. The certification must have been made by a licensed health care practitioner within the previous 12 months.

Benefits received. For information on excluding from gross income benefits you receive from a long-term care contract, see Publication 525, Taxable and Nontaxable Income.

Limits. You cannot deduct an amount more than your net earnings from the trade or business in which the medical insurance plan or long-term care insurance plan is established. If the business in which the insurance plan is established is an S corporation, you cannot deduct more than your wages from the S corporation. Do not subtract the self-employed health insurance deduction when figuring net earnings for your self-employment tax. However, subtract the amount of this deduction from your medical insurance when figuring your medical expenses on Schedule A (Form 1040) if you itemize your deductions.

Other coverage. You cannot take the deduction for any month if you were eligible to participate in any employer (including your spouse's) subsidized health plan at any time during that month. This rule is applied separately to plans that provide long-term care insurance and plans that do not provide long-term care insurance. However, any medical insurance payments not deductible on line 27 of Form 1040 can be included as part of your medical expenses on Schedule A (Form 1040) if you itemize your deductions.

How to figure the deduction. Generally, you can use the worksheet in the Form 1040 instructions to figure your deduction. However, if either of the following applies, you must use the worksheet that follows.

1.You have more than one source of income subject to self-employment tax, or 2.You file Form 2555 or Form 2555-EZ (relating to foreign earned income).

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If you have more than one health plan during the year, and each plan is established under a different business, you must use separate worksheets (in this chapter) to figure each plan's net earnings limit. Include your insurance payments under that plan on line 1 of the separate worksheet and your net profit (or wages) from that business on line 4 (or line 11).

Worksheet (Keep for your records.)1)Enter total payments made during the taxable year for health insurance coverage for yourself, your spouse, and your dependents. (Do not include payments for coverage for any month during which you were eligible to participate in a health plan subsidized by your or your spouse's employer.)           2)Percentage used to figure deduction for 1997      ╫.403)Multiply the amount on line 1 by the percentage on line 2           4)Enter your net profit and any other earned income* from the trade or business under which the insurance plan is established. (If the business is an S corporation, skip to line 11.)           5)Enter the total of all net profits from: line 31, Schedule C (Form 1040); line 3, Schedule C-EZ (Form 1040); line 36, Schedule F (Form 1040); or line 15a, Schedule K-1 (Form 1065); plus any other income allocable to the profitable businesses. See the instructions for Schedule SE (Form 1040). (Do not include any net losses shown on these schedules.)           6)Divide the amount on line 4 by the amount on line 5          7)Multiply the amount on Form 1040, line 26, by the percentage on line 6          8)Subtract the amount on line 7 from the amount on line 4          9)Enter the amount, if any, from Form 1040, line 28, attributable to the same trade or business in which the health insurance plan is established          10)Subtract the amount on line 9 from the amount on line 8          11)Enter your wages from your S corporation in which the health insurance plan is established           12)Enter the amount from Form 2555, line 43, attributable to the amount entered on line 4 or 11 above, or the amount from Form 2555-EZ, line 18, attributable to the amount entered on line 11 above           13)Subtract the amount on line 12 from the amount on line 10 or 11, whichever applies          14)Compare the amounts on lines 3 and 13 above. Enter the smaller of the two amounts here and on Form 1040, line 27. (Do not include this amount when figuring a medical expense deduction on Schedule A (Form 1040).)           *Earned income includes net earnings and gains from the sale, transfer, or licensing of property you created. It does not include capital gain income.