Form 7206: New self-employed health insurance deduction

Key takeaways

• Form 7206 is a new IRS form for self-employed taxpayers to figure their deduction for health insurance costs.
• Self-employed individuals, partners, and those who used optional methods to calculate net earnings from self-employment should file Form 7206.
• The primary purpose of the form is to calculate the amount that can be claimed for the self-employed health insurance deduction.
• Beyond health insurance costs, medical and dental insurance, as well as qualified long-term care insurance costs, are also considered on the form.

What is the new form for Self-employed Health Insurance Deduction?

If you are self-employed and purchase your own health insurance, IRS Form 7206 provides a straightforward way to claim your health insurance deductions, including those linked to long-term care insurance.

Prior to the 2023 tax year, self-employed tax filers would fill out the Self-Employed Health Insurance Deduction Worksheet found in Pub. 535, Business Expenses. The IRS replaced this worksheet with the more user-friendly and standalone Form 7206. Essentially, it is a tool that can help you get the most out of your health insurance deductions.

About Form 7206

Form 7206's primary purpose is to calculate the amount that can be claimed for the self-employed health insurance deduction. You’ll enter the total calculated from Form 7206 on Schedule 1 (Form 1040), line 17.

Beyond just covering your health insurance costs, Form 7206 also considers medical and dental insurance, as well as qualified long-term care insurance. And it's not just about you—your spouse, dependents, and any of your children under age 27 at the end of 2023, are also taken into account. These children don't need to be your dependents to qualify, and you can include your biological children, stepchildren, adopted children, or foster children.

Who should file Form 7206

Here's a closer look at who should consider filing form 7206:

1. If you are self-employed and reported a net profit for the year on Schedule C or Schedule F of Form 1040.
2. Partners with net earnings from self-employment reported on Schedule K-1 (Form 1065).
3. Those who used one of the optional methods to calculate their net earnings from self-employment on Schedule SE.
4. If you received wages in 2023 from an S-corp in which you were a more-than-2% shareholder and had your health insurance premiums paid or reimbursed by the S-corp.

For both self-employed people and partners, the insurance plan needs to be in your or the business's name. For more than 2% S-corp shareholders, the plan can be in either the corporation or the shareholder's name.

Limitations

Form 7206 contains some limitations. You can generally deduct the total amount paid for health insurance coverage for you, your spouse, and your dependents (including children under age 27 at the end of 2023). But, this doesn't include any amounts for months where you were eligible to participate in a health plan subsidized by your or your spouse's employer.

Also, retired public safety officers can’t use amounts their retirement plan paid directly to the insurer for health insurance premiums, or money they received from a retirement plan to pay those premiums to figure the deduction.

TurboTax Tip: Eligibility for an employer-sponsored health plan may affect the deductions you can take with Form 7206, and careful consideration is needed for both itemized deductions and self-employment tax.

Long term care payment deductions

When it comes to long-term care insurance, you can include your premiums when figuring your deduction. However, there are limits. You can only include the smaller of two amounts: the amount of premiums paid per person, or the amount shown for the individual's age at the end of the tax year.

Here's a breakdown by age:

• Age 40 or younger: $480
• Age 41 to 50: $890
• Age 51 to 60: $1,790
• Age 61 to 70: $4,770
• Age 71 or older: $5,960

You can only make claim deductions for qualified long-term care insurance. So, what makes a long-term care insurance contract "qualified"? The IRS lists several requirements. The contract:

• Must provide coverage only for qualified long-term care services.
• Must be guaranteed renewable.
• Must stipulate that refunds and dividends can only be used to reduce future premiums or increase future benefits.
• Cannot provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed.
• Generally, does not pay for services or items that would be reimbursed under Medicare, except if Medicare is a secondary payer or the contract offers per diem or other periodic payments without regard to expenses.

What are "qualified" long-term care services?

They are necessary diagnostic, preventative, and other related treatment services, as well as maintenance or personal care services. These services must be prescribed by a licensed healthcare provider for a chronically ill individual.

A "chronically ill" individual is defined by the IRS as someone who, due to loss of functional capacity for at least 90 days, can’t perform at least two basic living activities, like eating or dressing, without substantial help from another person. A chronically ill individual could also be someone who needs substantial supervision to protect their health and safety due to severe cognitive impairment.

Employer-sponsored coverage

You can’t take the deduction for any month you were eligible to participate in an employer-sponsored health plan (including your spouse's) at any time during that specific month. This rule is true regardless of whether or not you actually participated. Also, if you were eligible to take part in any employer-sponsored health plan for either your dependent or your child who was under age 27 at the end of 2023, you can’t use amounts paid for that month's coverage to calculate the deduction.

These rules apply separately to plans that provide long-term care insurance and plans that do not. The good news is that any medical insurance payments that are not deductible on line 17 of Form 1040 may be included as medical expenses if you decide to itemize your deductions, rather than take the standard deduction.

Keep in mind that you need to subtract the health insurance deduction from your medical insurance if you itemize your deductions.

Effect on self-employment tax

When you calculate the net earnings for your self-employment tax, you can’t subtract the self-employed health insurance deduction. For more details on this, refer to Schedule SE (Form 1040).

Remember, claiming the self-employed health insurance deduction requires careful consideration of your eligibility status, and impacts on both itemized deductions and self-employment tax.

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