Limited-time offers usually come from television pitchmen, but this year the Internal Revenue Service is tossing a couple at self-employed folks who cover their own health insurance. If that describes you, check out these breaks on your 2010 tax returns. They’re new this year, and could offer significant savings. Here are the details.
Health insurance premiums will offset the self-employment tax
People who have salaried jobs pay 7.65% in Social Security and Medicare taxes, and their employers pay a like amount. But self-employed workers pay both halves — a total of 15.3% — in what is called the self-employment tax. In all other years, they have been able to deduct their health insurance from their net income, but not until after the self-employment tax is calculated. So, a consultant earning $100,000 and paying $15,000 for health insurance would owe the self-employment tax on the full $100,000, and then be able to deduct $15,000 before the income tax is calculated. (Half of the self-employment tax is then deductible.) That would leave her with a $15,300 self employment tax, and a taxable income of $77,400.
Now the health insurance bill is deductible from the business earnings before the self-employment tax is calculated. That’s a one-year-only provision tucked into the Small Business Jobs Act of 2010. Using the same example of the consultant’s tax return, that would bring her self-employment tax down to $13,005, and the final taxable income up (because the self employment tax deduction would shrink) to $78,497. Her bottom line savings would be about $2,000. This break expires for tax year 2011, unless Congress decides to extend it.
Self-employed seniors get a break, too
Look closely at the instructions that go with your 1040 form and you’ll see that the rules have changed for older entrepreneurs, too. For tax year 2010, they are allowed to deduct their Medicare Part B health insurance premiums. That’s a new position from the IRS: Last year’s instructions said just the opposite, according to IRS spokesman Eric Smith.
How much will that save you? In 2010, most people paid $96.40 a month for Medicare Part B. That would net them tax savings of roughly $324 for the year, in the 28% tax bracket. But the monthly Medicare Part B premiums rise with income, and were as high as $353.60 a month in 2010 for taxpayers with income above $214,000 ($428,000 for couples). That could produce sizeable deductions for the most successful of self-employed seniors.