347 / How is health insurance coverage taxed for partners and sole proprietors?

Partners and sole proprietors are self-employed individuals, not employees, and the rules for personal health insurance apply ( Q 342, Q 343). Partners and sole proprietors can deduct 100 percent of amounts paid during a taxable year for insurance that provides medical care for the individual, his or her spouse, and dependents during the tax year. The insurance can also cover a child who was under age 27 at the end of the tax year, even if the child did not qualify as the taxpayer’s dependent. A child includes a taxpayer’s son, daughter, stepchild, adopted child, or foster child. A foster child is any child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

Certain premiums paid for long-term care insurance are also eligible for this deduction ( Q 488).¹

The deduction is not available to a partner or sole proprietor for any calendar month in which he or she is eligible to participate in any subsidized health plan maintained by any employer of the self-employed individual or his or her spouse. This rule is applied separately to plans that include coverage for qualified long- term care services or are qualified long-term care insurance contracts ( Q 477) and plans that do not include that coverage and are not those kinds of contracts.²

The deduction is allowable in calculating adjusted gross income and is limited to the self-employed individual’s earned income for the tax year that is derived from the trade or business with respect to which the plan providing medical care coverage is established. Earned income is, in general, net earnings from self-employment with respect to a trade or business in which the personal services of the taxpayer are a material income producing factor. Other rules govern contributions made to a qualified retirement plan ( Q 3928).