Can You Deduct Self Employed Insurance Premiums & HSA?

An important and often costly aspect of self-employment is securing health insurance. Many small-business owners have a difficult time replacing the typically employer-provided benefit at a reasonable cost; however, the federal government has a couple of tools that help aspiring entrepreneurs offset the expense of coverage.

Deductible Premiums

• A self-employed person is able to deduct all of his health insurance premiums for qualifying health care plans from his gross income on Form 1040, meaning that the person will pay no taxes on the money he pays in insurance premiums. This is an above-the-line deduction, which means the amount that you claim in premiums reduces your adjusted gross income, which affects the threshold against which you figure some of your itemized deductions.

HSA Background

• A Healthcare Savings Account, or HSA, is designed to be used as a tax-advantaged savings account that helps to pay for health care expenses. HSA accounts work with high-deductible health plans. You fund your HSA and can pay for non-reimbursed health care expenses from the account. The high deductible your health plan carries saves a considerable amount in premiums, which allows you to contribute that money to the HSA. In essence, you become partially self-insuring with an HSA account.

HSA Deductibility

• HSA contributions are deductible on your income tax in a similar way to an IRA. You deduct your contributions on your federal Form 1040, as another above-the-line deduction, meaning that it reduces your adjusted gross income; you do not have to itemize to take advantage of this deduction. The eligible contribution per year you can make to your HSA depends on the amount of the deductible of your health plan and the size of your family. The maximum contribution for a single person as of 2010 is $3,050 and $6,150 for a family. If you are older than 55, you can add $1,000 to your yearly contributions.

HSA Considerations

• Many HSA accounts will have their own debit card to use for eligible health care expenses. Many people find this easier to manage, because there are no forms to fill out and mail in for reimbursements. You do not have to use the HSA that your insurance company uses but can seek your own. Some examples of HSA-eligible purchases are prescription drugs and doctor visits. You can also use an HSA as an additional retirement savings account. Once you turn 60, you can withdraw from the HSA just like an IRA, for any purpose, and only pay taxes on what you withdraw.