Saturday, November 24, 2018

Are Short Term Insurance Premiums Deductible for the Self-Employed?

As we’ve mentioned, there were recent changes in the duration in which short term health insurance plans could cover individuals or families. Prior to these changes, they were meant to bridge participants between employment and were only available for 30-90 days. Thus, we never really considered these plans prior to this year and certainly never considered whether premiums for these plans would be deductible for self-employed individuals. Given we are self-employed and now considering these plans we figured it was a good time to answer this question and confirm premiums are deductible.

So let’s go to Publication 502, Medical and Dental Expenses (admittedly the 2017 version). Here is what it says regarding insurance premiums you can’t include in your deduction for the self-employed:

Insurance Premiums You Can't Include

You can't include premiums you pay for:
  • Life insurance policies,
  • Policies providing payment for loss of earnings,
  • Policies for loss of life, limb, sight, etc.,
  • Policies that pay you a guaranteed amount each week for a stated number of weeks if you are hospitalized for sickness or injury,
  • The part of your car insurance that provides medical insurance coverage for all persons injured in or by your car because the part of the premium providing insurance for you, your spouse, and your dependents isn't stated separately from the part of the premium providing insurance for medical care for others, or
  • Health or long-term care insurance if you elected to pay these premiums with tax-free distributions from a retirement plan made directly to the insurance provider and these distributions would otherwise have been included in income.
  • Taxes imposed by any governmental unit, such as Medicare taxes, aren't insurance premiums.

Coverage for nondependents
Generally, you can't deduct any additional premium you pay as the result of including on your policy someone who isn't your spouse or dependent, even if that person is your child under age 27. However, you can deduct the additional premium if that person is:

Your child whom you don't claim as a dependent because of the rules for children of divorced or separated parents,

Any person you could have claimed as a dependent on your return except that person received $4,050 or more of gross income or filed a joint return, or

Any person you could have claimed as a dependent except that you, or your spouse if filing jointly, can be claimed as a dependent on someone else's 2017 return.


We see nothing in this publication regarding short term health insurance premiums. Of course, we see nothing about healthshares either but I think it’s clear that this is not insurance. We’ll continue to research but our initial research indicates we could make the deduction. Anyone out there finding anything different (or even caring)?

2 comments:

  1. Yes, I care. Thanks again for posting your research. I am in a similar quandary over health insurance. I am a healthy 56 yr old self employed female. Short term policies with semi-reasonable premiums have huge deductibles per term which is maximum 184 days in Indiana. If I would enroll January 1 and encounter a serious accident, injury or diagnosis in mid June, I would be responsible for the deductible, co-payments until max out of pocket amount is reached and would likely be left with no insurance for the next 6 months as short term policy would not be renewed and ACA coverage would not be available until the following open enrollment. Liberty Health Share seems like the better way to go, but their financial viability and slow response to pay is very worrisome. Short term policies, health sharing ministries and the cheapest ACA policies do not have the option of depositing to a Health Savings Account which makes tax deductibility of premiums an even greater consideration. Thanks again for sharing.

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  2. Thanks for the comment and glad the content has been helpful! The 184 day limit really puts you in a difficult position. In Ohio we'd have about 5 days to deal with since our limit is 360 days but it's much more manageable (assuming you start the plan on January 1). We have a few updates on Liberty coming. My sense continues to be they are a bit overwhelmed operationally, which could be a symptom of poor systems and processes...of course the side benefit of inefficiency is the ability to conserve cash. Good luck and please post here or send a note if you find a more interesting solution!

    P.S. Depending on your specific financial situation there could be some interesting financial gymnastics to consider. For example, shielding income through a Solo 401K and/or HSA to lower Adjusted Gross Income and qualify for a subsidy (and then using savings to cover the difference in your monthly expenses). Another, on the high income side, would be using higher ACA premiums and a HSA contribution as significant deductions to avoid the Alternative Minimum Tax (AMT) if effected. This doesn't completely solve the problem but it significantly reduces your true cost of health insurance if you use premium and HSA deductions to avoid the AMT. Of course if you don't have to deal with the AMT in the first place your tax savings are more limited. I'll post on these soon!

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