When are insurance policy premiums tax deductible? This is a question most business owners ask when buying insurance. Well, this article will consider six factors that make insurance premiums tax deductible.
Most insurance policy premiums are typically not tax deductible. In fact, this is one of the reasons why entrepreneurs feel motivated to go for them in the first place.
However, in certain situations involving corporate arrangements, such as employee benefits, some of the premiums paid may qualify as eligible income tax deductions. Even some policies that are unrelated to corporate arrangements—such as medical and dental insurance—can be tax deductible due to a number of reasons.
Figuring out whether or not a specific insurance policy is tax deductible is usually complicated. And most of the time, this requires the involvement of tax professionals. However, there are quite a number of common instances when tax deductions can apply to insurance premiums. Some of these instances are discussed below.
6 Factors That Make Insurance Policy Premiums Tax Deductible
1. Self-employed, partnerships, S-corporations, LLCs, and LLPs
When you are self employed and run your own business or partner with other people, your health insurance premiums will be tax deductible. The same runs true for independent contractors, partners, and more than 2% shareholders of a subchapter S-Corporation.
The premiums you pay to cover yourself and your dependents can be tax deductible. However, they are not tax deductible if you, your spouse, or your dependents are covered by another employer’s group health insurance plan.
However, the amount that can be deducted is subjected to the age-based limits as set for individual taxpayers. The premium for the spouse of the self-employed individual can be included in the deduction even if the spouse is not an employee or officer of the company. Policies provided for non-owner employees are not taxable to the employee.
2. Auto insurance
Also, if you drive your car or truck for business purposes, rather for personal purposes only, your auto insurance can be tax deductible. Generally, the deduction for car and truck expenses will apply to self-employed people who use their own vehicle as part of the equipment for their business.
If you use your own car solely for personal use, such as daily commute to work, insurance on such a car is not tax deductible. However, there is a notable exception for people who travel long distances to their job sites.
3. Homeowners insurance
Another instance where insurance premiums are tax deductible is when you have homeowners insurance. This is deductible for rental properties. In addition, if you have an office in your home (that is, if you operate your business from home), a percentage of your homeowners insurance policy can be tax deductible.
4. Home equity lines of credit
Interest on home equity lines of credit are potentially tax deductible. Home equity loans can help turn otherwise personal interest (say on credit cards) into tax deductible interest. In order to maximize this deduction; you need to pay attention to the various limitations for the mortgage interest deduction. In the U.S, only $100,000 of loan principal used for consolidating debt and for other expenses can qualify for tax deduction.
5. Health insurance
If you work for a company offering health insurance as part of what’s known as a cafeteria plan, you may have a health savings account (HSA). The contribution you make to your HSA is 100% tax deductible up to a limit of a certain limit for family coverage and individual coverage.
If you are not self-employed, and you are not working for a company that provides health insurance with a cafeteria plan, you are allowed (by the Internal Revenue Service) to regard health and dental insurance premiums as part of the 7.5% of your adjusted gross income that has been spent on health care before any out-of-pocket medical expenses can be deducted.
6. Life insurance
Life insurance premiums may be tax deductible if you are an employer and pay for all or part of the cost of your employees’ coverage. But generally, life insurance premiums are not tax deductible, unlike some types of medical insurance.
However, you don’t have to pay sales tax on insurance policies you purchase. And some forms of coverage—such as term life insurance—are among the most affordable ways to protect your family’s financial future. A term policy can replace your income if you die unexpectedly. It will provide the income your family needs to pay the mortgage on your home and pay for your family cars, day-to-day living expenses, your children’s college education fund, and even your own funeral expenses.
In conclusion, most insurance policy holders are not aware of which policies are tax deductible and which policies are not. If you need help, I advice you contact a seasoned insurance broker.