Hidden Tax Break for Self-Employed

Last Updated Feb 28, 2011 10:47 AM EST

Self-employed? If you buy health insurance, there's an incredibly lucrative tax break that could save you hundreds of dollars, but don't expect to find it on the 1040. It's hidden.

"This is a one-time only opportunity available for 2010 taxes, so if you are self employed be sure to take advantage of it," said Keith Mendonsa, consumer specialist with eHealthInsurance.com.

The fact that it's a one-time break may also be why it's so hard to find, says Mark Luscombe, principal tax analyst with CCH Inc. The IRS may have simply decided it was too much trouble to revise tax forms for a break that would only be available for a few months.

But it's definitely worth finding. Just ask Sande Drew, a self-employed publicist, who says the break saved her $981. But she had to ask her accountant to hunt for it because he didn't get the memo.

"It is a little obscure," admits Luscombe.

What is it? For the 2010 tax year only, any premiums you pay for health insurance when you are self employed can be claimed as a deduction against your Social Security and Medicare taxes, effectively saving you 15.3% on that cost. If your health insurance premiums amount to $750 a month, or $9,000 a year, that saves you as much as $1,377 in self-employment taxes.

Health insurance premiums are also deductible against income taxes, but that's been true for years and is easy to see on the 1040. In fact, the deduction for health premiums for the self-employed is a so-called "before the line" deduction that can be claimed even by those who don't itemize.

This break, on the other hand, needs a careful reading of the instructions to form SE, says Luscombe. You're supposed to write in the deduction on line 3 of the form SE, which asks you to list your net profit or loss from your business.

How do you do that? On the empty dotted line, write "health insurance premiums" and put the amount in brackets. Then subtract that amount from the self-employment income you show on the Schedule C. The result is what's used to calculate your self employment taxes. That will save you 12.4% on Social Security and 2.9% for Medicare.

Of course, don't forget to claim these premiums on line 29 of the 1040 too. That cuts your income tax bill, too.

The high cost of health insurance is the bane of many self-employed workers, but the deductions can take away at least a little of the sting. Don't miss them, Mendonsa stresses.

"It's a lot of money to leave on the table because you don't know your options," he said.

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