Every fall I have a version of the same conversation. A client who works for herself tells me her husband is picking his benefits at work, and she wants to know whether it changes anything on her return. She is planning to keep her own policy either way, so she assumes the answer is no.
The answer is usually yes, and it can cost her the entire deduction for part of the year.
What you are allowed to deduct
If you are self-employed and you pay for your own health coverage, you can generally deduct what you paid in premiums for yourself, your spouse, your dependents, and any child of yours who was not yet 27 at the end of the year. That comes from IRC 162(l)(1). It is an above-the-line deduction, which means you get it whether or not you itemize.
That is the part most people already know. The condition attached to it is the part that surprises them.
The condition: eligible, not enrolled
IRC 162(l)(2)(B) says the deduction does not apply for any calendar month in which you were eligible to participate in a subsidized health plan maintained by an employer of yours, or by an employer of your spouse.
Read that again, because the operative word is eligible. The statute does not ask whether you joined the plan. It asks whether the plan was open to you.
The IRS says the same thing in plainer English. The instructions for Form 7206, which is the form the deduction is computed on, state that you cannot take the deduction for any month you were eligible to participate in an employer subsidized health plan, including your spouse’s, at any time during that month, “even if you didn’t actually participate.”
So the usual reasoning fails. “His company’s plan was worse than mine, so I stayed on my own policy” does not preserve the deduction. Neither does “we never signed the paperwork.” If the coverage was available to you, those months are gone.
It is a month-by-month test, not a yes-or-no test
This is the second thing that gets missed, and it works in your favor more often than against you.
The statute says “any calendar month.” It does not say “any year in which.” So a mid-year change splits the year rather than destroying it.
Suppose you are a self-employed general contractor here in Humble. You pay $780 a month for your own policy all year. Your spouse starts a new job in October, and her employer’s family coverage becomes available to you beginning December 1.
You have eleven good months. January through November, nothing was available to you through an employer, so those premiums stay deductible, subject to the limit I describe below. December is out. You do not lose the year, and you do not have to drop your own policy to salvage anything.
Now flip the timing. If her coverage had become available to you on February 1 instead, you would be deducting one month of premiums instead of eleven. Same marriage, same policy, same money out of your pocket, and a very different return. That is why the month the coverage becomes available is worth knowing before anyone makes an election, not in March when we are preparing the return.
The ceiling most people have never heard of
Even in the months you clear that hurdle, the deduction is capped. Under IRC 162(l)(2)(A), it cannot exceed your earned income from the trade or business under which the health plan was established.
In practice that means a slow year limits the deduction. If your Schedule C nets $4,000 and you paid $9,400 in premiums, you are not deducting $9,400 here. The excess does not vanish entirely, because premiums you cannot deduct under 162(l) can be carried into your itemized medical expenses under IRC 213 instead, which is a far weaker deduction but not nothing.
And note the phrase “the trade or business under which the plan was established.” If you run two businesses and the policy is tied to the one that lost money, the profitable one does not rescue it. Which business the plan sits under is a decision, and it is worth making on purpose.
One thing this deduction does not do
It does not lower your self-employment tax.
IRC 162(l)(4) keeps the deduction out of the computation of net earnings from self-employment, and the Form 7206 instructions repeat it: you cannot subtract the self-employed health insurance deduction when figuring net earnings for self-employment tax.
I raise this because I have seen people make a coverage decision expecting relief on both taxes. This deduction reduces income tax. The 15.3 percent stays where it is.
A narrow bit of good news on long-term care
The last sentence of IRC 162(l)(2)(B) applies the eligibility test separately to plans that include qualified long-term care coverage and to plans that do not.
So if your spouse’s employer offers you subsidized medical coverage but no long-term care coverage, your eligibility for the medical plan does not by itself disqualify long-term care premiums you pay. Those premiums are also subject to the age-based dollar limits in IRC 213(d)(10). This is a small point that matters a great deal to the handful of clients it applies to.
Where I tell clients to ask rather than assume
A few situations sit close to the line, and I would rather you call than guess:
- Coverage that becomes available only after a waiting period. The question is which months the plan was actually open to you, and the start of that window is not always the hire date.
- A spouse who is offered coverage for themselves only, with no family or spousal tier. If the plan was never open to you, that is a different fact than a plan you declined.
- Coverage through a dependent’s or a child’s employer. The statute reaches that too, and most people do not expect it to.
- A self-employed person who is also an S corporation shareholder. IRC 162(l)(5) changes how earned income is measured, and premium reporting has its own requirements.
I would rather spend fifteen minutes on your facts than see a deduction disallowed later.
What to do this month
Before your spouse finalizes their benefits election, ask their HR or benefits administrator one question in writing: for which months of the plan year is coverage available to me as a spouse?
Keep the answer. That one email is the substantiation for every month you claim, and it is far easier to get now than a year from now.
Then bring it to whoever prepares your return, along with what you actually paid in premiums and which business the policy is attached to. The three pieces together are what produce a defensible number.
Sources
- IRC 162(l), Special rules for health insurance costs of self-employed individuals: www.law.cornell.edu/uscode/text/26/162
- Instructions for Form 7206, Self-Employed Health Insurance Deduction: www.irs.gov/pub/irs-pdf/i7206.pdf
- IRC 213(d)(10), eligible long-term care premiums: www.law.cornell.edu/uscode/text/26/213
I am Deanna R. Ngueket, CPA, and I work with self-employed professionals and business owners in Houston, Spring, Humble and Atascocita on tax planning, tax preparation, and resolving IRS and state notices. If you want this looked at against your own numbers before year end, reach me at info@deannacpa.com or 713-730-9792.
This article is general information, not advice for your situation. Deanna R. Ngueket, CPA, LLC.
Self-employed? See my guide to quarterly taxes for 1099 contractors.
