Health Insurance Deduction now reduces taxes even more.

A new law change effective for 2010 will allow deduction of Health Insurance Premiums from Self Employment (SE) Tax liability as well as Income Tax liability. Small business owners have been able to reduce their income tax liability previously but have still been hit with 15.3% SE Tax on net income and no way to reduce it.

This law change will allow for some relief from the SE Taxes as well. The deduction is taken on line 3 of the Form SE and essentially results in a 15.3% discount on health insurance premiums that were paid for the year. The IRS is developing a new From SE and the draft is available for review at the IRS website. Here is the word from the IRS: Health Insurance Deduction Reduces Self Employment Tax: With the enactment of the Small Business Jobs Act of 2010, self-employed taxpayers who pay their own health insurance costs can now reduce their net earnings from self-employment by these costs.

Previously, the self-employed health insurance deduction was allowed only for income tax purposes. For tax year 2010, self-employed taxpayers can also reduce their net earnings from self employment subject to SE taxes on Schedule SE by the amount of self-employed health insurance deduction claimed on line 29 on Form 1040. Taxpayers can claim the self-employed health insurance deduction if the insurance plan is established under their business and if any of the following are true: • They were self-employed and had a net profit for the year,
• They used one of the optional methods to figure net earnings from self-employment on Schedule SE, or
• They received wages from an S corporation in which the taxpayer was a more-than-2-percent shareholder. During tax year 2008, the most recent year for which data is available, the self-employed health insurance deduction was claimed on 3.6 million tax returns, reducing taxpayers’ adjusted gross incomes by $21 billion.

And here is what the National Association of Self Employed (NASE) says: Self-Employed Health Insurance Deduction – As always, the premiums paid for health insurance by the small business owner will be deducted on page one of form 1040. But for 2010, those same premiums can be included on Schedule E, Self Employment Tax as a deduction reducing net earnings from self employment and reducing the related Self Employment Tax. This can be up to a 15.3% savings on the cost of health insurance.