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Insurance Tax Breaks for Self-Employed

Deducting Self-employed Medical Insurance for S Shareholders
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A 2% employee-shareholder may be eligible for an above-the-line deduction for the cost of accident and health insurance premiums paid by the corporation. The deduction is equal to 100% of the amount paid for medical insurance for the shareholder, his spouse, and dependents and is reported as an adjustment to income on the shareholder's Form 1040.
This deduction has two limitations:

1. The deduction is not available for calendar months in which the 2% shareholder or spouse is eligible to participate in another employer-subsidized health insurance plan.

2. The deduction cannot exceed the taxpayer's earned income derived from the trade or business that provides the health insurance plan. S corporation shareholders treat their social security wages from the S corporation as earned income for purposes of this limitation

Where to report

The amount of the accident and health insurance premiums paid should be reflected on your W-2 as wages not subject to Social Security or Medicare.  This amount should also be listed in box 14 noted as SCorp MP with the $$ amount.


Family Attribution Rules

The members of an S shareholder's family are treated as owning the S shareholder's stock for purposes of the fringe benefit rules. Under the family stock attribution rules, a person is considered to own the stock owned by that person's spouse, children, grandchildren, and parents. Stock constructively owned by one family member cannot be reattributed to a second family member when applying the attribution rules to that second family member.


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