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
- If a partnership pays accident and health insurance premiums for its partners, it 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 can deduct the premiums.
- Liability insurance.
- Malpractice insurance that covers your professional personal liability for 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
- If a partnership pays workers' compensation premiums for its partners, it can deduct
these amounts as guaranteed payments to the partners.
- If an S corporation pays the workers' compensation premiums for its shareholders, it can
deduct these amounts.
- Contributions to a state unemployment insurance fund. You can deduct these contributions
as taxes if they are considered taxes under state law.
- Overhead insurance. This insurance pays you for business overhead expenses you have
during long periods of disability caused by your injury or sickness.
- Car and other vehicle insurance. This insurance 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 the beneficiary under the contract.
- Use and occupancy and business interruption insurance. This insurance 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 45% of the amount paid during 1998 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.
Percentage increases after 1998. For tax years beginning after 1998, 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
|1999 through 2001||60%
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 you can include only the lesser of the
- The amount you pay.
- The amount shown below.
- Age 40 or less -- $210
- Age 41 to 50 -- $380
- Age 51 to 60 -- $770
- Age 61 to 70 -- $2,050
- Age 71 and above -- $2,570
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:
- Be guaranteed renewable,
- 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,
- Not provide for a cash surrender value or other money that can be paid, assigned,
pledged as collateral for a loan, or borrowed, and
- 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:
|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.
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 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
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 28 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.
|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). |
Self-Employed Health Insurance Deduction Worksheet
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