You can generally deduct premiums you pay for the following kinds
of insurance related to your trade or business.
- Fire, theft, flood, or similar insurance.
- Credit insurance on losses from unpaid debts.
- Group hospitalization and medical insurance for employees,
including long-term care insurance.
- If a partnership pays accident and health insurance premiums
for its partners, it generally can deduct them as guaranteed payments
made to the partners.
- If an S corporation pays accident and health insurance
premiums for its 2% shareholder-employees, it generally can deduct
them.
For more details, see Accident and Health Benefits in
chapter 2 of Publication 15-B, Employer's Tax Guide to
Fringe Benefits.
- Liability insurance.
- Malpractice insurance that covers your personal liability
for professional negligence resulting in injury or damage to patients
or clients.
- Workers' compensation insurance set by state law that covers
any claims for bodily injuries or job-related diseases suffered by
employees in your business, regardless of fault.
- If a partnership pays workers' compensation premiums for its
partners, it generally can deduct these amounts as guaranteed payments
to the partners.
- If an S corporation pays the workers' compensation premiums
for its 2% shareholder-employees, it generally can deduct these
amounts.
- Contributions to a state unemployment insurance fund are
deductible as taxes if they are considered taxes under state
law.
- Overhead insurance that pays you for business overhead
expenses you have during long periods of disability caused by your
injury or sickness.
- Car and other vehicle insurance that covers vehicles used in
your business for liability, damages, and other losses. If you operate
a vehicle partly for personal use, you can deduct only the part of
your insurance premiums that applies to the business use of the
vehicle. If you use the standard mileage rate to figure your car
expenses, you cannot deduct any car insurance premiums.
- Life insurance covering your officers and employees if you
are not directly or indirectly a beneficiary under the
contract.
- Use and occupancy and business interruption insurance that
pays you for lost profits if your business is shut down due to a fire
or other cause.
Health Insurance
Deduction for the
Self-Employed
You can deduct 60% of the amount paid during 2000 for medical
insurance and qualified long-term care insurance for yourself and your
family if you are one of the following.
- A self-employed individual.
- A general partner (or a limited partner receiving guaranteed
payments) in a partnership.
- 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 28 of Form 1040.
Deductible percentage increases after 2001.
For tax years beginning after 2001, the deductible percentage of
your health insurance premiums gradually increases. The increases are
shown in the following table.
For Tax Years
Beginning in: |
Deductible
Percentage |
| 2000 and 2001 |
60% |
| 2002 |
70% |
| After 2002 |
100% |
Long-term care insurance.
If you pay the premiums on a qualified long-term care insurance
contract for yourself, your spouse, or your dependents, you can
include those premiums when figuring your deduction. But, for each
person covered, you can include only the smaller of the following
amounts.
- The amount you pay for that person.
- The amount shown below. (Use the person's age at the end of
the tax year.)
- Age 40 or younger -- $220
- Age 41 to 50 -- $410
- Age 51 to 60 -- $820
- Age 61 to 70 -- $2,200
- Age 71 and older -- $2,750
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 meet all the following requirements.
- It must be guaranteed renewable.
- It must 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.
- It must not provide for a cash surrender value or other
money that can be paid, assigned, pledged as collateral for a loan, or
borrowed.
- It generally must 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:
- Necessary diagnostic, preventive, therapeutic, curing,
treating, mitigating, and rehabilitative services, and
- Maintenance or personal care services.
The services must be 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.
- 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.
- 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.
Table 7-1. Self-Employed Health Insurance Deduction Worksheet
Limits.
You cannot deduct 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.
Other coverage.
You cannot take the deduction for any month 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 28 of Form 1040 can be
included as part of your medical expenses on Schedule A (Form 1040) if
you itemize your deductions.
Effect on self-employment tax.
Do not subtract the health insurance deduction when figuring net
earnings for your self-employment tax.
Effect on itemized deductions.
Subtract the health insurance deduction from your medical insurance
when figuring 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 any of the following apply, you
must use the worksheet in this chapter.
- You have more than one source of income subject to
self-employment tax.
- You file Form 2555 or Form 2555-EZ (relating to
foreign earned income).
- You are using amounts paid for long-term care insurance to
figure the deduction.
More than one health plan and business.
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 (Table 7-1) to figure each plan's net
earnings limit. Include the premium you paid under each plan on line 1
of that separate worksheet and your net profit (or wages) from that
business on line 6 (or line 13). For a plan that provides long-term
care insurance, enter the premiums paid on line 2 instead, but the
total of the amounts entered for each person on line 2 of all
worksheets cannot be more than the appropriate limit shown on line 2
for that person.
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