The health insurance deduction most 1099 workers miss

A four-minute read · Tatiana Andrea Real

If you’re 1099, your health insurance premium isn’t only a bill. It may also be a deduction, and it’s one of the few you can take without itemizing.

It’s called the self-employed health insurance deduction. It comes off your income before your adjusted gross income is figured, which is why it’s worth more to most people than a deduction they would have to itemize to claim.

What counts. Medical, dental and vision premiums, plus qualified long-term care premiums, for you, your spouse and your dependents. It also covers your children who are under 27 at the end of the year, even if you don’t claim them as dependents. Long-term care premiums are capped by age, from $480 a year at 40 or younger up to $6,020 at 71 and over.

Now, the four rules that trip people up.

One: it can’t be bigger than what the business earned. The deduction is capped at the net earnings of the business the plan is established under. A year with no profit is a year with no deduction.

Two: any month you could have joined an employer plan is out. If you were eligible for a subsidized health plan through an employer, yours or your spouse’s, those months don’t count. Turning it down doesn’t help. This is the one that catches people whose spouse works a W-2 job.

Three: it doesn’t touch your self-employment tax. The IRS is explicit about this. You can’t subtract the deduction when you figure net earnings for self-employment tax. It lowers your income tax and leaves the 15.3 percent alone.

Four: you can’t deduct what the subsidy already paid. If you took advance premium tax credits on a Marketplace plan, only the premium that came out of your own pocket is deductible. The deduction lowers your income, your income changes your credit, and your credit changes the deduction, so the IRS publishes a worksheet that loops until it settles. Your CPA knows it as Publication 974.

Here’s why I bring this up in November instead of leaving it for April. That fourth rule runs both directions. Your income estimate sets your subsidy, your subsidy moves your deduction, and your deduction moves your income. If your income swings from month to month, guessing at that estimate is the most expensive thing you can do. Estimate too high and you overpay all year. Estimate too low and you hand it back at tax time.

So the plan you pick and the deduction you take are one conversation, not two. We get your income estimate as close as it can honestly be, then price the options around it: Marketplace with a credit, or the private market if that lands better for you.

One thing I have to be straight about: I’m a licensed insurance broker, not a CPA or a tax preparer. Everything above is general information drawn from IRS Form 7206 and Publication 974. It isn’t tax advice about your return. Your accountant runs your numbers. My job is making sure the coverage is right and the income estimate behind it’s realistic, because that’s what your accountant has to work with.