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Warning: Good and Bad News for Self-Employed Individuals’ Health Coverage

© Vetkit | Dreamstime.com - <a href="https://www.dreamstime.com/stock-photo-stethoscope-dollar-bills-close-up-image53680843#res2965056">Stethoscope And Dollar Bills Photo</a>Every individual is required to have minimum essential health coverage for him/herself and children up to age 18 or pay a penalty (unless exempt from the coverage requirement). Even if the law didn’t require it, having coverage is still advisable for good health and to avoid financial ruin in case of a catastrophic accident or illness. Self-employed individuals seeking coverage from a government Marketplace must look to the individual exchange; they cannot use the Small Business Health Care Options (SHOP), which is the government exchange for small businesses.

The good news

If you are a self-employed individual who obtains coverage through a government Marketplace, you may be eligible for a subsidy in the form of the premium tax credit. This can offset the premium cost. Check your eligibility annually, because income limits — and your earnings — change each year. Open enrollment on the individual exchange for 2017 coverage begins on November 1, 2016, and ends on January 31, 2017, for the federal Marketplace (some state exchanges have ending dates in December 2016).

Health insurance premiums of a self-employed individual that are not subsidized are deductible in full from gross income. This means you can subtract them from your income whether or not you itemize deductions in lieu of the standard deduction.

The bad news

If you don’t have minimum essential health coverage through a spouse’s plan, a government plan, or an individual policy, you’re likely going to owe a tax penalty. The penalty for 2016 is the greater of:

  • A flat dollar amount ($695 per adult; $347.50 per child) up to a maximum of $2,085 for the family.
  • A percentage of household income (2.5% for 2016) in excess of the income tax filing threshold for your filing status ($10,300 for a single person; $20,600 for a family).

The penalty cannot exceed the national average premium for a bronze plan. For 2016, this is $2,676 for a single individual. For a family of 5 or more, it’s $13,380. However, the amount is prorated on a monthly basis for those who are uninsured for a portion of the year. Thus, having coverage for part the year trims the penalty.

Even if you have coverage and don’t owe any penalty, the fact that your deduction for premiums is only a personal deduction and not a business deduction means you’re at a disadvantage taxwise. Because you can’t deduct the premiums from your business income to arrive at net earnings from self-employment, your self-employment tax is higher than it would be if you could net the premiums against earnings. It doesn’t affect the income tax you pay because you reduce your gross income by this amount but it greatly impacts self-employment tax. For example, if you were able to reduce your net earnings from self-employment by your premiums of $10,000, you’d save $1,530 (the Social Security and Medicare taxes at 15.3%). (Technically, the savings would be somewhat less because half of the tax is deductible.) In past years there have been proposals to allow a business deduction for health insurance premiums of self-employed individuals, but there’s been no discussion of this lately.

Conclusion

Can you afford to roll the dice and go bare (no health coverage)? Can you afford the coverage? Is it less than the penalty for no coverage? Can you find coverage that’s affordable -- through a spouse’s employer or with a tax credit subsidy? These are all questions you should answer before 2017 enrollment begins.

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