Friday, December 20, 2013

Self-employed? That pre-ACA health insurance deduction is still there...

Self-employed and seeking health insurance? Call an accountant.

Everyone who's paying attention knows that shoppers on the ACA exchanges are eligible for premium subsidies if their income is under 400% of the Federal Poverty Level  (FPL) and the benchmark silver plan in their area would cost them more than 9.5% of their income (for young people in states with low premiums, subsidies may fade out somewhere under 300% FPL).

Equally important for those who qualify are additional subsidies to reduce deductibles and maximum yearly out-of-pocket costs. As I pointed out in a prior post, these subsidies have hard break points: they bump up at income levels of $17,235 and $22,980 and phase out at $28,775. Since self-employed "profit from business" is notably malleable, and since retirement contributions come off the Modified Adjusted Gross Income (MAGI) used to calculate subsidy eligibility, the low income self-employed are well advised to keep an eye on those break points.

There is in fact a third dip for the low-income self-employed -- and a longstanding major benefit for those with higher incomes. It's the self-employment health insurance deduction. If you're self-employed and buying insurance for yourself and/or your family on the individual market, you can deduct the full cost of the insurance from your MAGI. That is, if your self-employment income exceeds the cost of insurance after various other deductions:

Before claiming this tax deduction, you must calculate your allowable health insurance deduction. Take your self-employment income, and subtract the 50% deduction for self-employment taxes, and subtract any retirement contributions made to SEP-IRA, SIMPLE-IRA, or Keogh plan. The remainder is your allowable deduction for health insurance expenses.
If you're ACA subsidy-eligible, this array of benefits makes for some rather complex calculations. As management professor William Ocasio points out:
What's that symbol of the snake eating itself?

The wealthy self-employed, e.g., many lawyers and doctors, also have a substantial benefit in the self-employment health insurance tax deduction, which can also be used for dental and long-term-care insurance. That's a premium subsidy of up to 39.6%, depending on your income. It doesn't match the two-thirds to three-quarters that the average employer contributes (plus an employee tax deduction for the remainder), but it's not nothing, either.

See also:
The ACA's subsidy cliff for older buyers
Young, self-employed, and seeking insurance? See an accountant

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