Medical Insurance Deduction for Indies

Hi June,

I like how you write, it's fresh and easy to understand.

I have a question. I'm considering quitting my job and working for myself doing free-lance technical writing at home. My big fear is the cost of health insurance. Any tips?

As a sole proprietor, can I deduct ALL my health insurance premiums and out of pocket expenses? If yes, then basically does that lower my taxable income? Can you give me an idea if that would make my health insurance premiums about equal (after all taxes paid at year end) to what I would have paid working for my current employer? Currently I spend $130/month, but I received an estimate of $250-$400/month from Blue Cross/Blue Shield as an independent person (depending on the type of health plan chosen).

Is there any other way to recoup that insurance premium besides a tax deduction, too?

Thanks.
Holly from Warrenville, IL


Hello Holly,

Let me give an overview of how medical deductions work.

If a taxpayer is not self-employed then medical insurance premium costs and all other medical costs are deducted as a personal expense in what I call "the guts" of the tax return. If these medical expenses do not come over a certain minimum or if the taxpayer's income is so high that the medical expenses don't meet another threshold, then the deduction for medical expenses is lost.

If a taxpayer is self-employed, here's the difference: Medical insurance costs are deducted on "the front" of the return and immediately reduce taxable income. Other medical costs are still deducted as a personal expense in "the guts" of the return. No medical expense is a direct deduction from business income.

There is no way, without analysing your personal tax return and projected income, to tell whether your new premiums would actually cost you any money. Why not calculate as if you simply had an additional $270 [400 - 130] cost per month and see if you could handle that?

Glad you like my writing. Thanks!
June